E4.6 Eliminating Entries After First and Second Years During 2020, Peerless Comp
ID: 2337389 • Letter: E
Question
E4.6 Eliminating Entries After First and Second Years During 2020, Peerless Company's wholly owned subsidiary, Safeco Inc. reported net income of $1,600,000 and declared and paid dividends of $600,000. Pecrless acquired Safeco on January 2, 2020, at a cash cost of $8,000,000, which was $1,000.000 in excess of the book value of net assets acquired. Safeco's equipment (five-year life) was undervalued by $500,000. Its inventory, reported using FIFO, was undervalued by $200,000. The remain- ing $300,000 could not be allocated to identifiable assets and liabilities. Impairment testing indicates that goodwill was impaired by $50,000 during 2020. Safeco's beginning inventory was sold during 2020. Required Prepare the journal entries recorded by Peerless in 2020 to record the acquisition and apply the com- plete equity method. Prepare the necessary eliminating entries to consolidate the financial statements of Peerless and Safeco at December 31,2020 Safeco reported net income of $2,000,000 and declared and paid dividends of $800,000 in 2021 There was no further goodwill impairment. Prepare the journal entries recorded by Peerless in 2021 to apply the complete equity method. Prepare the necessary eliminating entries to consolidate the financial statements of Peerless and Safeco at December 31,2021 a. b.Explanation / Answer
Peerless’s entries for 2020:
Investment in Safeco 8,000,000
Cash 8,000,000
Investment in Safeco 1,250,000
Equity in net income of Safeco 1,250,000
Cash 600,000
Investment in Safeco 600,000
Consolidation working paper eliminating entries for 2020:
Equity in net income of Safeco 1,250,000
Dividends – Safeco 600,000
Investment in Safeco 650,000
Stockholders’ equity—Safeco,1/1 7,000,000
Investment in Safeco 7,000,000
Equipment, net 500,000
Inventory 200,000
Goodwill 300,000
Investment in Safeco 1,000,000
Depreciation expense 100,000
Cost of goods sold 200,000
Goodwill impairment loss 50,000
Equipment, net 100,000
Inventory 200,000
Goodwill 50,000
Peerless’s equity method entries for 2021
:Investment in Safeco 1,900,000
Equity in net income of Safeco 1,900,000
Cash 800,000
Investment in Safeco 800,000
The Investment in Safeco balance at December 31, 2021 is $8,000,000 + 1,250,000 – 600,000 + 1,900,000 – 800,000 = $9,750,000.
Consolidation working paper eliminating entries for 2021:
Equity in net income of Safeco1,900,000
Dividends – Safeco 800,000
Investment in Safeco 1,100,000
Stockholders’ equity—Safeco, 1/1 8,000,000
Investment in Safeco 8,000,000
Stockholders’ equity—Safeco at 1/1/2021 = $7,000,000 + 1,600,000 – 600,000 = $8,000,000
Equipment, net 400,000
Goodwill 250,000
Investment in Safeco 650,000
Depreciation expense 100,000
Equipment, net 100,000
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