Question

On January 1, 20X1, Prange Company acquired 100% of the common stock of Seaman Company for $600,000. On this date Seaman had total owners' equity of $400,000. Any excess of cost over book value is attributable to a patent, which is to be amortized over 10 years. During 20X1 and 20X2, Prange has appropriately accounted for its investment in Seaman using the simple equity method. On January 1, 20X2, Prange held merchandise acquired from Seaman for $30,000. During 20X2, Seaman sold merchandise to Prange for $100,000, of which $20,000 is held by Prange on December 31, 20X2. Seaman's gross profit on all sales is 40%. On December 31, 20X2, Prange still owes Seaman $20,000 for merchandise acquired in December. Required: Complete the worksheet similar to Figure 4-1 (following) for consolidated financial statements for the year ended December 31, 20X2. Prepare your worksheet in Excel. Following is a template in Figure 4-1 that will guide you in setting up your worksheet in Excel.

Answer 1

SOLUTION:

Eliminations and Adjustments:

(CY)	Elimination of the current-year entries made in the investment account and in the subsidiary income account.
(EL)	Elimination of the Seaman Company equity balances at the beginning of the year against the investment account.
(D)	Distribution of the amount of $200,000 excess of cost over BV to patent.
(A)	Amortization of the patent over 10 years, with $20,000 for 20X1 charged to retained earnings, and amount of $20,000 for 20X2 to operating expenses.
(BI)	Eliminate the $12,000 of gross profit in the beginning inventory.
(IS)	Elimination of the entire intercompany sales of $100,000.
(EI)	Elimination of the $8,000 of gross profit in the ending inventory.
(IA)	Elimination of the $20,000 intercompany accounts receivable and payable.