Modified Equity Method and Cost Method
Newtime Products purchased 65 percent of TV Sales Company’s stock at underlying book value on January 1, 20X3. At that date, the fair value of the non controlling interest was equal to 35 percent of the book value of TV Sales. TV Sales reported shares outstanding of $300,000 and retained earnings of $100,000. During 20X3, TV Sales reported net income of $50,000 and paid dividends of $5,000. In 20X4, TV Sales reported net income of $70,000 and paid dividends of $20,000.
The following transactions occurred between Newtime Products and TV Sales in 20X3 and 20X4:
1. TV Sales sold camera equipment to Newtime for a $40,000 profit on December 31, 20X3. The equipment had a five-year estimated economic life remaining at the time of intercompany transfer and is depreciated on a straight-line basis.
2. Newtime sold land costing $30,000 to TV Sales on June 30, 20X4, for $41,000.
Required
a. Assuming that Newtime uses the modified equity method to account for its investment in TV Sales:
(1) Give the journal entries recorded on Newtime’s books in 20X4 related to its investment in TV Sales.
(2) Give all eliminating entries needed to prepare a consolidation worksheet for 20X4.
b. Assuming that Newtime uses the cost method to account for its investment in TV Sales:
(1) Give the journal entries recorded on Newtime’s books in 20X4 related to its investment in TV Sales.
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