Question

On January 1, 2018 Long Company acquired 80% of the outstanding voting common stock of Fall

Company for $8, 064, 000 cash. Long Company uses the equity method. During 2018 Fall reported

$1,344,000 of net income and paid $576,000 in dividends. The stockholder’s equity section of

December 31, 201, balance sheet for Fall was as follows:

Stockholder’s equity

Paid in capital:

Common stock-$84 par                        $8,400,000

Retained earnings                                   $1,680,000’

Prepare the general journal entries to record the investment and the effect of Fall’s

Income and dividends on Long Company’s accounts.

Prepare the elimination entry that would be made on the work sheet for a consolidated

Balance sheet as of the date of acquisition.

Answer 1

Common Stock	8,400,000
Retained Earnings	1,680,000
Net book Value of Subsidiary's assets	10,080,000	Subsidiary's common stock plus retained earnings, at the time of acquisition
Share of Parent (80%)	8,064,000
Non Controlling Interest (20%)	2,016,000
Consideration paid by Parent	8,064,000
Share of parent in net assets	(8,064,000)
Goodwill	-

Journal entries in the book of Long

	Debit	Credit	Notes
Investment in Fall company	8,064,000		Amount paid for acquiring shares of Fall company
Cash		8,064,000	Amount paid for acquiring shares of Fall company
Investment in Fall company	1,075,200		Recording of income from Fall company as per equity method, ie 80% of Fall's income
Income from Fall company		1,075,200	Recording of income from Fall company as per equity method, ie 80% of Fall's income
Cash	460,800		Recording of dividend from Fall company as per equity method, ie 80% of total dividend
Investment in Fall company		460,800	Recording of dividend from Fall company as per equity method, ie 80% of total dividend

Elimination entries

	Debit	Credit	Notes
Common Stock	8,400,000		Elimination of Fall's common stock
Retained Earnings	1,680,000		Elimination of Fall's retained earnings
Investment in Fall company		8,678,400	Elimination of amount in "investment in Fall company" as on date
Non Controlling interest		2,016,000	Apportionment to non controlling interest
Income from Fall company	1,075,200		Elimination of income received from Fall recorded in the books of Long
Dividends Paid		460,800	Elimination of dividend paid by Fall to Long