Question

Equity Method and Eliminating Entries Three Years After Acquisition

Puffin Industries acquired all of Sunset Coast Digital's stock on January 1, 2014, for $8,750,000, $5,250,000 in excess of book value. At that time, Sunset Coast's inventory (LIFO) was overvalued by $1,250,000 and its plant assets (10-year life) were overvalued by $2,500,000. The remaining excess of cost over book value is attributed to undervalued identifiable intangible assets being amortized over 20 years. Sunset Coast depreciates plant assets and amortizes intangibles by the straight-line method. During 2014 and 2015, Sunset Coast reported a total net income of $1,625,000 and paid out 50 percent in dividends. Puffin carries its investment in Sunset Coast using the complete equity method. Sunset Coast's inventory increased each year since it was acquired by Puffin, and Sunset Coast's reported net income for 2016 was $500,000, and dividends totaled 50 percent of reported income.

a. Compute Puffin's 2016 equity in net income of Sunset Coast.

b. Compute the balance in the Investment in Sunset Coast account at December 31, 2016, after all equity method entries have been booked.

c. Prepare the working paper eliminating entries needed in consolidation at December 31, 2016.

Consolidation Journal
Ref.	Description	Debit	Credit
(C)	AnswerEquity in net income of Sunset CoastDividends - Sunset CoastStockholders' equity-Sunset Coast, 1/1Investment in Sunset CoastIdentifiable intangiblesPlant assets, netGoodwillInventory	Answer	Answer
	AnswerEquity in net income of Sunset CoastDividends - Sunset CoastStockholders' equity-Sunset Coast, 1/1Investment in Sunset CoastPlant assets, netIdentifiable intangiblesGoodwillInventory	Answer	Answer
	Investment in Sunset Coast	Answer	Answer
(E)	AnswerEquity in net income of Sunset CoastDividends - Sunset CoastStockholders' equity-Sunset Coast, 1/1Investment in Sunset CoastPlant assets, netIdentifiable intangiblesGoodwillInventory	Answer	Answer
	AnswerEquity in net income of Sunset CoastDividends -Sunset CoastStockholders' equity-Sunset Coast, 1/1Investment in Sunset CoastPlant assets, netIdentifiable intangiblesGoodwillInventory	Answer	Answer
(R)	AnswerEquity in net income of Sunset CoastDividends - Sunset CoastStockholders' equity-Sunset Coast, 1/1Investment in Sunset CoastIdentifiable intangiblesPlant assets, netGoodwillInventory	Answer	Answer
	Inventory	Answer	Answer
	Plant assets, net	Answer	Answer
	AnswerEquity in net income of Sunset CoastDividends - Sunset CoastStockholders' equity-Sunset Coast, 1/1Investment in Sunset CoastIdentifiable intangiblesPlant assets, netGoodwillInventory	Answer	Answer
(O)	AnswerEquity in net income of Sunset CoastDividends - Sunset CoastStockholders' equity-Sunset Coast, 1/1Investment in Sunset CoastPlant assets, netIdentifiable intangiblesGoodwillInventory	Answer	Answer
	Amortization expense	Answer	Answer
	Depreciation expense	Answer	Answer
	AnswerEquity in net income of Sunset CoastDividends - Sunset CoastStockholders' equity-Sunset Coast, 1/1Investment in Sunset CoastPlant assets, netIdentifiable intangiblesGoodwillInventory	Answer	Answer

d. If Puffin reports $1,500,000 net income from its own operations in 2016, what is consolidated net income for 2016?

Answer 1

Calculation of equity in net income for 2016: $500,000 Sunset Coast's reported net income for 2016 Revaluation write offs: Plant assets ($2,500,000/10) Identifiable intangibles $9,000,000/20 Equity in net income of Sunset Coast $250,000 ($450,000) $300,000 Note: Identifiable intangibles at the date of acquisition are $5,250,000 + 1,250,000 + 2,500,000 $9,000,000. b. Calculation of investment balance at December 31, 2016: Investment in Sunset Coast, December 31, 2014 $8,750,000 Sunset Coast's reported income, 2014-2015 13 $1,625,000 Sunset Coast's reported dividends, 2014-2015(50% of ($812,500) reported income): Revaluation write offs, 2014-2015: Plant assets [($2,500,000)/10] X 2 BATHR $125,000 Identifiable intangibles ($9,000,000/20) x2 ($900,000) Investment in Sunset Coast, December 31, 2016 $8,787,500 Under LIFO and increasing inventory, the acquisition date revalued inventory is assumed to still be on hand.

Sunset Coast's stockholders' equity, December 31, 2013= $3,500,000 (acquisition cost $8,750,000 less excess over book value $5,250,000). Sunset Coast's stockholders' equity, January 1, 2016 = $3,500,000 + (1 -.5)(1,625,000 –500,000) = $3,725,000. (R) Identifiable intangibles $8,100,000 Inventory Plant assets, net Investment in Sunset Coast $1,250,000 $2,000,000 $4,850,000 Revaluations at January 1, 2016 = original revaluations less write offs for 2014 and 2015. (O) Plant assets, net Amortization expense $250,000 $450,000 Depreciation expense Identifiable intangibles $250,000 $450,000 d. Puffin's income from its own bperations plus equity in net income of Sunset Coast = consolidated net income: $1,500,000 + $300,000 = $1,800,000,