On January 1, 20X1, LGM Company purchased 80% of the outstanding common stock of
ID: 2425934 • Letter: O
Question
On January 1, 20X1, LGM Company purchased 80% of the outstanding common stock of MEL Company for $296,000. On this date, the book value of MEL’s net asset was equal to $370,000. LGM uses the equity method to account for investments. Below is the trial balance for both LGM and MEL as of December 31, 20X1
LGM MEL
Cash 191,000 46,000
Accounts Receivable 140,000 60,000
Inventory 190,000 120,000
Investment in MEL 350,400 0
Land 250,000 125,000
Buildings & Equipment 875,000 250,000
Cost of Goods Sold 250,000 155,000
Depreciation Expense 65,000 12,000
Selling & Adm. Expense 280,000 50,000
Dividends Declared 80,000 25,000
Accumulated Depreciation 565,000 36,000
Accounts Payable 77,000 27,000
Bonds Payable 250,000 100,000
Common Stock 625,000 250,000
Retained Earnings 280,000 120,000
Sales 800,000 310,000
Income from MEL 74,400 0
Required:
1. Prepare all necessary journal entries to record the investment in MEL.
2. Prepare the book value calculations.
3. Prepare all necessary elimination entries for the consolidating worksheet of December 31, 20X1.
4. Complete the consolidating worksheet for December 31, 20X1.
5. Prepare the following financial statements:
a. Balance Sheet
b. Income Statement
6. Determine the amount of total revenue, total expense and net income to be reported as of December 31, 20X1 under the following consolidation alternatives:
a. Parent Company Concept
b. Economic Entity Concept
Explanation / Answer
1. investment in MEL Dr.$ 296000
To cash 296000
(Being investment purchased in MEL)
cash (25000 * 80%) Dr.$20000
To investment in MEL 20000
(Being dividend recieved)
investment in MEL(95000 *80%) Dr.76000
To equity income in MEL 76000
(Being net income in MEL recorded)
Note:- retained earning - dividend = net income
120000 - 25000 = net income
net income = 95000