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In: Accounting

Pinot Noir Company obtains 100% of Sangria Company's stock on January 1, 2016. As of that...

Pinot Noir Company obtains 100% of Sangria Company's stock on January 1, 2016. As of that date, Sangria has the following trial balance:

                                                                                                          Debit           Credit

Accounts payable                                                                                                $50,000

Accounts receivable                                                                         $40,000

Additional paid-in-capital                                                                                     $50,000

Buildings(4-year remaining life)                                                      $120,000

Cash and short-term investment                                                      $60,000

Common stock                                                                                                  $250,000

Equipment (5 year remaining life)                                                   $200,000

Inventory                                                                                           $90,000

Land                                                                                                  $80,000

Long term liabilities (mature 12/31/19)                                                                $150,000

Retained earnings, 1/1/16                                                                                   $100,000

Supplies                                                                                            $10,000

      Totals                                                                                         $600,000      $600,000

During 2016, Sangria reported net income of $80,000 while declaring and paying dividends of $10,000. During 2017, Sangria reported net income of $110,000 while declaring and paying dividends of $30,000

Assume that Pinot Noir company acquires Sangria's common stock for $490,000 in cash. As of January 1,2016, Sangria's land had a fair value of $90,000, its building were valued at $200,000, and its equipment was appraised at $180,000. Pinot Noir uses the equity method for this investment.

Required:

Prepare consolidation worksheet entries for December 31, 2016 and Dec 31,2017.

Solutions

Expert Solution

Equity mehod is accounting for consolidation is like a accounting for investment. In this method acquirer open a investment account in its books for accounting and adjust the value of investment in associates in a manner to approach to determine the value of investment on a said that. Both the companies maintain separate accounts in this approach.

So Consolidation Entries will be as follows for this problem.

01-01-2016

Dr. Investment in Sangria Company A/c 490000

Cr. Cash 490000

(100% Stock purchased of sangria company and recorded under equity approach)

31-12-2016 (For dividend received from Sangria Company)

Dr Cash A/c 10000

Cr Investment in Sangria Company A/c 10000

(Share of dividend from associate recorded)

31-12-2016 (For Earning Share)

Dr.  Investment in Sangria Company A/c 80000

Cr. Investment Revenue 80000

(Share of earning in Sanria Company recorded )

31-12-2017

31-12-2017 (For dividend received from Sangria Company)

Dr Cash A/c 30000

Cr Investment in Sangria Company A/c 30000

(Share of dividend from associate recorded)

31-12-2017 (For Earning Share)

Dr.  Investment in Sangria Company A/c 110000

Cr. Investment Revenue 110000

(Share of earning in Sanria Company recorded )

The Balance of Investment is sangria Company in Books of Pinot Noir will be as follows

As on 31-12-2016 (490000 - 10000 + 80000) = $560000

As on 31-12-2017 (560000 - 30000 + 110000) = $640000

This account will be shown in balance sheet in long term investments.

ekkarill92 answered 1 year ago
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