Question

Phone Corporation owns 80 percent of Smart Company's stock. At the end of 20X8, Phone and Smart reported the following partial operating results and inventory balances: Phone Corporation Smart Company Total sales $ 679,000 $ 519,000 Sales to Smart Company 150,500 Sales to Phone Corporation 250,500 Net income 31,000 Operating income (excluding investment income from Smart) 81,000 Inventory on hand, December 31, 20X8, purchased from: Smart Company 50,100 Phone Corporation 45,150 Phone regularly prices its products at cost plus a 40 percent markup for profit. Smart prices its sales at cost plus a 20 percent markup. The total sales reported by Phone and Smart include both intercompany sales and sales to nonaffiliates. Required: a. What amount of sales will be reported in the consolidated income statement for 20X8? b. What amount of cost of goods sold will be reported in the 20X8 consolidated income statement? (Do not round intermediate calculations and round your final answers to nearest whole dollar amount.) c. What amount of consolidated net income and income to controlling interest will be reported in the 20X8 consolidated income statement? d. What balance will be reported for inventory in the consolidated balance sheet for December 31, 20X8?

On the date of the stock acquisition, Pepper's shares were selling at $35, and Salt Manufacturing's buildings and equipment had a remaining economic life of 10 years. The amount of the differential assigned to goodwill is not impaired.

In the two years following the stock acquisition, Salt Manufacturing reported net income of $81,000 and $51,000 and paid dividends of $29,000 and $41,000, respectively. Pepper used the equity method in accounting for its ownership of Salt Manufacturing.

Required:
a. Prepare the entry recorded by Pepper Corporation at the time of acquisition. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
  

Journal entry worksheet

• Record the acquisition of Salt Manufacturing.

Note: Enter debits before credits.

	Event General Journal Debit Credit 1

b-1. Prepare the journal entries recorded by Pepper during 20X0 related to its investment in Salt Manufacturing. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Journal entry worksheet

• Record the acquisition of Salt Manufacturing.
• Record the dividends received from Salt Manufacturing.
• Record the equity-method income for period.
• Record the entry to amortize the differential assigned to buildings and equipment.

Note: Enter debits before credits.

	Event General Journal Debit Credit 1

b-2. Prepare the journal entries recorded by Pepper during 20X1 related to its investment in Salt Manufacturing. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Journal entry worksheet

• Record the dividends received from Salt Manufacturing.
• Record the equity-method income for period.
• Record the entry to amortize the differential assigned to buildings and equipment.

Note: Enter debits before credits.

	Event General Journal Debit Credit 1

c. What balance will be reported in Pepper’s investment account on December 31, 20X1?

Investment account balance :

Answer 1

a.	Consolidated sales for 20X8:
		phone	smart	Consol-
		Corp.	Co.	idated
	Sales reported	$679,000	$519,000
	Intercorporate sales	(150,500)	(250,500)
	Sales to nonaffiliates	$528,500	$268,500	$797,000
b.	Consolidated cost of goods sold:
	Total sales reported	$679,000	$519,000
	Ratio of cost to sales price	1.4		1.2
	Cost of goods sold	$485,000(679000*100/140)	$432,500(519000*100/120)
	Amount to be eliminated
	(see entry)	(131,850)	(242,150)
	Cost of goods sold adjusted	$353,150	$190,350	$543,500

phone:
	Total	=	Re-sold	+	Ending Inventory
Sales	150,500		105,350		45,150
COGS	107,500 (150500*100/140)		81,000		26,500
Gross Profit	43,000		24,350		18,650
Gross Profit %	28.57%

smart:
	Total	=	Re-sold	+	Ending Inventory
Sales	250,500		200,400		50,100
COGS	208,750 (250500*100/120)		167,000(200400*100/120)		41,750
Gross Profit	41,750		33,400		8,350
Gross Profit %	16.67%

	Eliminating entries:
		Sales	150,500
		Cost of Goods Sold		131,850
		Inventory		18,650
		Elimination of sales by phone to smart:
		Sales	250,500
		Cost of Goods Sold		242,150
		Inventory		8,350
		Elimination of sales by smart to phone:

c.	Operating income of phone Corporation (excluding
	income from smart Company)		$81,000
	Net income of smart Company		31,000
			$112,000
	Less:	Unrealized inventory profits of phone		(18,650)
		Unrealized inventory profits of smart		(8,350)
	Consolidated net income		$85,000
	Less:	Income assigned to noncontrolling interest
	($31,000 - $8,350) x 0.20		(4,530)
	Income to controlling interest 20X8		$80,470
d.	Inventory balance in consolidated balance sheet:
	Inventory reported by phone Corporation	$50,100
	Unrealized profits	(8,350)	$41,750
	Inventory reported by smart Company	$45,150
	Unrealized profits	(18,650)	26,500
	Inventory balance, December 31, 20X8		$68,250