Question

*Note: Please don't use previous solutions answered on cheg, they are incorrect*

Question:

Georgia, Inc. bought 30% of Carolina Company on January 1, 2016 for $225,000. The equity method was used. No amortization was required. In 2016, Carolina shipped to Georgia merchandise with a cost of $12,000 and a selling price of $15,600. One-third of the merchandise remained in Georgia’s inventory at year-end and was sold in 2017. In 2017, Carolina received merchandise from Georgia, who recorded agross profit of $18,000 on the sale. One-fourth of the merchandise remained in ending inventory. Carolina reported net income of $50,000 in 2016 and $62,000 in 2017. Dividends of $8,000 were paid to Georgia each year.

Required:Prepare all equity method entries for 2016 and 2017

Answer 1

Georgia, Inc. Compute unrealized gross profit in December 31, 2016 inventory: ($15,600 $12,000) x 1/3 $1,200 Compute unrealized gross profit in December 31, 2017 inventory: ($18,000 x 1/4) $4,500 Journal Enteries Debit in $ Credit in $ Date Particulars 2016 Equity Method Entries: Equity Investment a/c Dr 225000 To Cash 225000 To record investment in Carolina Equity Investment a/c Dr 15000 To Equity Income 15000 To record Georgia's equity in Carolina's reported income) 0.30 x $50,000 Cash a/c Dr 2400 To Equity Investment 2400 (To record dividends received 0.30 x $8,000.) Equity Income a/c Dr. 360 To Equity Investment 360 (To recognize deferral of unrealized gross profit) 0.30 x $1,200 2017 Equity Method Entries Equity Investment a/c Dr 18600 To Equity Income 18600 To record Georgia's equity in Carolina's reported income) 0.30 x $62,000 Cash a/c Dr 2400 To Equity Investment 2400 (To record dividends received 0.30 x $8,000.) Equity Income a/c Dr. 360 To Equity Investment 360 (To recognize deferral of unrealized gross profit) 0.30 x $1,200 Equity Income a/c Dr. 1350 1350 To Equity Investment (To recognize deferral of unrealized gross profit) 0.30 x $4,500