Page 572 - Accounting Principles (A Business Perspective)

This book is licensed under a Creative Commons Attribution 3.0 License

• S Company owes P Company USD 5,000 on a note at December 31.
• Including its share (100 per cent) of S Company's income, P Company earned USD 31,000 during 2010.

• P. Company paid a cash dividend of USD 10,000 during December 2010.
• P Company uses the equity method of accounting for its investment in S Company.
P Company and Subsidiary S Company
Consolidation Balance Sheet
2010 January 1
Assets
Current assets:
Cash $ 54,000
Accounts receivable, net 39,000
Merchandise inventory 65,000
Total current assets $158,000
Property, plant, and equipment:
Equipment, net $ 56,000
Building, net 100,000
Land 30,000
Total property, plant, and equipment 186,000
Goodwill 5,200
Total assets $349,200
Liabilities and stockholders' equity
Current liabilities:
Account payable 24,000
Minority interest 21,200
Stockholders' equity:
Common stock $250,000
Retained earnings 54,000
Total stockholders' equity 304,000
Total liabilities and stockholders equity $349,200
Exhibit 112: Consolidated balance sheet
The financial statements for the two companies as of 2010 December 31, are in the first two columns of Exhibit
113.
The work sheet shown in Exhibit 113 allows us to prepare a consolidated income statement, statement of
retained earnings, and balance sheet. Notice that in Exhibit 113, P Company has a balance of USD 20,000 in its
Income of S Company account and a balance of USD 133,000 in its Investment in S Company account. These
balances are the result of the following journal entries made by P Company in 2010:
2010
Jan. 1 Investment in S Company (+A) 121,000
Cash (-A) 121,000
To record 100% investment in subsidiary.

Dec. 31 Investment in S Company (+A) 20,000
Income in S Company (+SE) 20,000
To record income of subsidiary.
31 Cash (+A) 8,000
Investment in S Company (-A) 8,000
To record dividends received from
subsidiary.
The explanations for the elimination entries on the work sheet in Exhibit 113 are as follows:
Entry 1: During the year, S Company earned USD 20,000. P Company increased its investment account
balance by USD 20,000. Entry 1 on the work sheet eliminates the subsidiary's income from the Investment in S
Company account and the Income of S Company account (USD 20,000). This entry reverses the entry made on the

books of P Company to recognize the parent's share of the subsidiary's income (the first December 31 journal
entry).
P Company and Subsidiary S Company

Accounting Principles: A Business Perspective 573 A Global Text