Homework Answers
equity method of accounting is followed when a co holds a certain amount of shares in the co. but does not fully control the other co. in most of the cases, this percentage ranges between 20 to 50%, although in this case there is 90% holding the co. still follows the equity method of accounting.
under this method, the co record the transaction as the investment and this investment is reduced by every time a dividend is received and also by the amount of profit earned.
1. investment account.
on investment
investment in saxton corporation a/c ............... Dr 3,774,000
To cash a/c 3,774,000
( being investment made by palm corp in Saxton corp)
on recording the amount of profit.(2014)
investment in saxton corp a/c.......................Dr 222,030
to investment revenue 222,030
( being amount of profit declared by Saxton but not distributed $246,700*90% = 222,030)
on recording the amount of profit.(2015)
investment in saxton corp a/c.......................Dr 275,130
to investment revenue 275,130
( being amount of profit declared by Saxton but not distributed $305700*90% = 275130)
goodwill
investment in saxton corp a/c.......................Dr 498840
to goodwill 498840
( being goodwill calculated)
3774000 is the amount paid for goods worth 4747600*90%=4272840, thus goodwill = $498840
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Exercise 7-12
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Exercise 7-12
Pomeroy Corporation owns an 80% interest in Sherer Company and a
90% interest in Tampa Company. On January 2, 2014, Tampa Company
sold equipment with a book value of $631,800 to Sherer Company for
$705,300. This equipment has a remaining useful life of three
years. Sherer Company reported $108,800 and Tampa Company reported
$154,500 in net income (including sales to affiliates) in 2014.
Prepare the 2014 and 2015 consolidated statements workpaper entries
to eliminate the effects of this...
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