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Problem I. On January 1, 2019, P Corp acquired 80% of the outstanding common stock of...

Problem I. On January 1, 2019, P Corp acquired 80% of the outstanding common stock of S Corp for $820,000 cash. On that date, S Company’s stockholders’ equity consisted of common stock, $150,000; other contributed capital, $200,000; and retained earnings, $350,000. P Corp paid more than the book value of net assets acquired because the recorded cost of S Corp’s equipment (5 year remaining useful life) was $40,000 less than its fair value; the remainder was allocated to goodwill. There were acquisition related costs of $40,000 at the date of acquisition.

During 2019 S Corp earned $240,000 and declared and paid a $80,000 dividend. P Corp used the equity method to record its investment in S Corp. In addition, P Corp sold (transferred) $100,000 of goods to S Corp on account. The goods cost P Corp $60,000. At the end of 2019, approximately $20,000 of the transfer remains unsold.

During 2020 S Corp earned $280,000 and declared and paid a $90,000 dividend. The unsold goods from 2019 were all sold to 3rd parties. In addition, P Corp. sold (transferred) $120,000 of goods to S Corp on account. The goods cost P Corp $90,000. At the end of 2020, approximately $30,000 of the transfer remains unsold.

1-. Prepare the journal entries on P Corp’s books to record S Corp’s income and dividends during 2020, as well as any other necessary journal entries during the year.

2-Prepare the worksheet entries at December 31, 2020

Solutions

Expert Solution

Date Particulars Debit $ Credit $
31-12-2020 Investment in S Corp account $224,000
Share of Income from S Corp account $224,000
(80% of income received from S Corp i.e.
80% of $2,80,000 recognised as income)
31-12-2020 Cash $ 72,000
Investment in S Corp account $ 72,000
(80% of dividend $90,000 received from
S Corp recognized)
31-12-2020 Investment in S Corp account $    6,400
Share of Income from S Corp account $    6,400
(Gross profit on unsold goods at the end of
2019 which was unrealized at that time and
realized in 2020 after-sale to 3rd parties
recognized. $20,000* 40% GP * 80% share)
31-12-2020 Share of Income from S Corp account $    6,000
       Investment in S Corp account $    6,000
(Unrealized gross profit on $30,000 sales to
S Corp which remained unsold on year-end
reversed $30,000* 25% GP* 80% share)
Investment in S Corp account
31-12-2020 Share of Income from S Corp account $224,000 31-12-2020 Cash $ 72,000
31-12-2020 Share of Income from S Corp account $    6,400 31-12-2020 Share of Income from S Corp account $    6,000
31-12-2020 Balance c/f $152,400
$230,400 $230,400
Share of Income from S Corp account
31-12-2020 Investment in S Corp account $    6,000 31-12-2020 Investment in S Corp account $224,000
31-12-2020 Balance c/f $224,400 31-12-2020 Investment in S Corp account $    6,400
$230,400 $230,400
Cash Account
31-12-2020 Investment in S Corp account $ 72,000 31-12-2020 Balance c/f $ 72,000

ekkarill92 answered 2 years ago
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