Question

On January 1, 2019, P Company purchased 80% of the common stock of S Company for $1,200,000. During 2019, S Co. distributed a dividend in the amount of $240,000 and at year- end reported a $400,000 net income. Any difference between implied and book value relates to subsidiary goodwill. P Company uses the equity method to record its investment and no impairment of goodwill needed for first year. At acquisition date, S Co. stockholders' equity consisted of the following: Common stock Other contributed capital Retained earnings $440,000 180,000 640,000 Use the above information to answer the following:

1) The journal entry to record the net income reported by S Co. in the books of P Co. will include: *

a) Credit Equity in Subsidiary Income $400,000

b) Credit Equity in Subsidiary Income $320,000

c) Credit Investment in S Co. $400,000

d) Credit Investment in S Co. $320,000

2)The eliminating entries required to prepare consolidated financial statements on Dec 31, 2019 will include: *

a)Credit Noncontrolling Interest in Equity $300,000

b)Credit Noncontrolling Interest in Equity $200,000

c)Credit Investment in S Co $1,500,000

d)Credit Investment in S Co $1,600,000

3)The journal entry to record the investment in S Co. in the books of P Co. will include: *

a)Debit Investment in S Co. $1,200,000

b)Debit Cash $1,200,000

c)Credit Investment in S Co. $1,200,000

d)Credit Common Stock $1,200,000

4) The balance of Investment in S Co. in P Co. trial balance on Dec 31, 2019 will be: *

a) $1,362,000

b) $1,328,000

c) $1,200,000

d) $1,396,000

5)The journal entry to record the dividend distributed by S Co. in the books of P Co. will include: *

a)Debit Cash $ 192,000

b)Debit Cash $ 240,000

c)Debit Investment in S Co. $192,000

d)Debit Investment in S Co. $240,000

6) The eliminating entries required to prepare consolidated financial statements on Dec 31, 2019 will include: *

a) Credit Other Contributed Capital $180,000

b) Credit Retained Earnings $640,000

c) Credit Common Stock $440,000

d) Credit Dividend Declared $192,000

Answer 1

Journal Entries in Consolidation
Date	General Ledger Name	Debit	Credit
1	Investment A/c---Dr	320,000
	To Equity in Subsidiary Income A/c		320,000
	(Being income share as per equity method accounted)
2	Common Stock of S Co.---Dr.	440,000
	Other contributed Capital of S Co.---Dr	180,000
	Retained earnings of S Co.---Dr	800,000
	Goodwill A/c---Dr	192,000
	To Investment A/c		1,328,000
	To Non-Controlling Interest A/c		284,000
	(Being consolidation entry recorded)
3	Investment in S Co. A/c---Dr	1,200,000
	To Cash A/c		1,200,000
	(being investment recorded)
4	Investment at cost	1,200,000
	Add: Share in income - 80% of (400,000-240000)	128,000
	Investment as at 31 December	1,328,000
5	Cash A/c---Dr	192,000
	To Dividend Inome A/c		192,000
	(Being dividend income recorded)
6	Common Stock of S Co.---Dr.	440,000
	Other contributed Capital of S Co.---Dr	180,000
	Retained earnings of S Co.---Dr	800,000
	Goodwill A/c---Dr	192,000
	Dividend Income A/c--Dr	192,000
	To Investment A/c		1,328,000
	To Non-Controlling Interest A/c		284,000
	To Retained Earnings A/c		192,000
	(Being consolidation entry recorded)