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 $7,000,000, $4,200,000 in excess of book value. At that time, Sunset Coast's inventory (LIFO) was overvalued by $1,000,000 and its plant assets (10-year life) were overvalued by $2,000,000. 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 total net income of $1,300,000 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 $400,000, and dividends totaled 50 percent of reported income. 

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

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

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

(C) Equity in Net Income of Sunset Coast                                    _____

            Dividends - Sunset Coast                                                            _____

            Investment in Sunset Coast                                                        _____

(E) Stockholder's Equity - Sunset Coast 1/1                                _____

            Investment in Sunset Coast                                                        _____

(R) Identifiable Intangibles                                                            _____

            Inventory                                                                                     _____

            Plant Assets, Net                                                                        _____

            Investment in Sunset Coast                                                        _____

(O) Plant Assets, Net                                                                    _____

      Amortization Expense                                                             _____

            Depreciation Expense                                                                 _____

            Identifiable Intangibles                                                                _____

d. If Puffin reports $1,200,000 net income from its own operations in 2016, what is consolidated net income for 2016?

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