Question

Server Corporation is a majority-owned subsidiary of Proxy Corporation. Proxy acquired 75 percent ownership on January 1, 20X3, for $133,500. At that date, Server reported common stock outstanding of $60,000 and retained earnings of $90,000, and the fair value of the noncontrolling interest was $44,500. The differential is assigned to equipment, which had a fair value $28,000 more than book value and a remaining economic life of seven years at the date of the business combination. Server reported net income of $30,000 and paid dividends of $12,000 in 20X3.
Required:
a. Give the journal entries recorded by West during 20X3 on its books if it accounts for its investment in Canton using the equity method.
b. Give the eliminating entries needed at December 31, 20X3, to prepare consolidated financial statements.

Answer 1

Answer:

1/1/2013

Dr Investment in server corporation $133,500

Cr Cash $133,500

1/1/2013

Dr Investment in server corporation $22,500

Cr Cash $22,500

1/1/2013

Dr Cash $9000

Cr Investment in server corporation $9000

1/1/2013

Dr Investment in server corporation $3000

Cr Investment income from serverbcorporation $3000

Explanation:

Preparation of the journal entries

1/1/2013

Dr Investment in server corporation $133,500

Cr Cash $133,500

(To record cash invested)

1/1/2013

Dr Investment in server corporation $22,500

($30,000*75/100)

Cr Cash $22,500

( To record cash invested according to net income)

1/1/2013

Dr Cash $9000

Cr Investment in server corporation $9000

( To record cash received)

1/1/2013

Dr Investment in server corporation $3000

Cr Investment income from serverbcorporation $3000

( To record cash recieved from income)