Large Ltd. purchased 80% of Small Company on January 1, Year 6, for $660,000, when the statement of financial position for Small showed common shares of $490,000 and retained earnings of $190,000. On that date, the inventory of Small was undervalued by $51,000, and a patent with an estimated remaining life of five years was overvalued by $76,000.
Small reported the following subsequent to January 1, Year 6:
Profit (Loss) | Dividends | |||||
Year 6 | $ | 116,000 | $ | 34,000 | ||
Year 7 | (44,000) | 19,000 | ||||
Year 8 | 99,000 | 49,000 | ||||
A test for goodwill impairment on December 31, Year 8, indicated a loss of $20,200 should be reported for Year 8 on the consolidated income statement. Large uses the cost method to account for its investment in Small and reported the following for Year 8 for its separate-entity statement of changes in equity:
Retained earnings, beginning | $ | 590,000 | |||
Profit | 290,000 | ||||
Dividends | (61,000) | ||||
Retained earnings, end | $ | 819,000 | |||
Required:
(a) Prepare the cost method journal entries of Large for each year. (Omit $ sign in your response.)
Year 6
General Journal | Debit | Credit |
(Click to select) Investment in Small Equity method income Dividend income Current assets Goodwill Account receivable Cash Long-term investment | ||
(Click to select) Investment in Small Long-term investment Account receivable Current assets Dividend income Inventories Goodwill Cash | ||
To record the purchase of 80% of Small Company | ||
(Click to select) Long-term investment Investment in Small Dividend income Goodwill Cash Current assets Account receivable Inventories | ||
(Click to select) Current assets Goodwill Investment in Small Inventories Long-term investment Dividend income Account receivable Cash | ||
To record dividend received from Small Company | ||
Year 7
General Journal | Debit | Credit |
(Click to select) Cash Long-term investment Goodwill Current assets Account receivable Inventories Investment in Small Dividend income | ||
(Click to select) Dividend income Inventories Goodwill Long-term investment Current assets Investment in Small Account receivable Cash | ||
To record dividend received from Small Company | ||
Year 8
General Journal | Debit | Credit |
(Click to select) Goodwill Current assets Cash Long-term investment Dividend income Account receivable Investment in Small Inventories | ||
(Click to select) Inventories Current assets Cash Account receivable Dividend income Investment in Small Long-term investment Goodwill | ||
To record dividend received from Small Company | ||
Based on detail provided it seems that all Journal entry is not asked in respect of equity method like accounting of income from Investment for Year 6,7 & 8 and only entry appears in table needs to be worked out which is as under :
Year 6 | ||
Investment in Small | 660,000 | |
Cash | 660,000 | |
To record the purchase of 80% of Small Company | ||
Cash | 27,200 | |
Investment in Small (34,000*80%) | 27,200 | |
To record dividend received from Small Company | ||
Year 7 | ||
Cash | 15,200 | |
Investment in Small (19,000*80%) | 15,200 | |
To record dividend received from Small Company | ||
Year 8 | ||
Cash | 39,200 | |
Investment in Small (49,000*80%) | 39,200 | |
To record dividend received from Small Company |
Large Ltd. purchased 80% of Small Company on January 1, Year 6, for $660,000, when the...
Large Ltd. purchased 80% of Small Company on January 1, Year 6, for $660,000, when the statement of financial position for Small showed common shares of $490,000 and retained earnings of $190,000. On that date, the inventory of Small was undervalued by $51,000, and a patent with an estimated remaining life of five years was overvalued by $76,000. Small reported the following subsequent to January 1, Year 6: Profit (Loss) Dividends Year 6 $ 116,000 $ 34,000 Year 7 (44,000...
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