Question: On January 1 2011 James Company purchases 70 of the

On January 1, 2011, James Company purchases 70% of the common stock of Craft Company for $245,000. On this date, Craft has common stock, other paid-in capital in excess of par, and retained earnings of $50,000, $100,000, and $150,000, respectively.
On May 1, 2012, James Company purchases an additional 20% of the common stock of Craft Company for $92,000. Net income and dividends for two years for Craft Company are as follows:
In 2012, the net income of Craft from January 1 through April 30 is $30,000. On January 1, 2011, the only tangible asset of Craft that is undervalued is equipment, which is worth $20,000 more than book value. The equipment has a remaining life of four years, and straight-line depreciation is used. Any remaining excess is goodwill.
In the last quarter of 2012, Craft sells $50,000 in goods to James, at a gross profit rate of 30%. On December 31, 2012, $10,000 of these goods are in James’s ending inventory. The trial balances for the companies on December 31, 2012, are as follows:
1. Using this information, prepare a determination and distribution of excess schedule. Prepare an analysis of the later purchase of a 20% interest.
2. James Company carries the investment in Craft Company under the simple equity method. In general journal form, record the entries that would be made to apply the equity method in 2011 and 2012.
3. Compute the balance that should appear in Investment in Craft Company and in Subsidiary Income on December 31, 2012 (the second year). Fill in these amounts on James Company’s trial balance on the worksheet for 2012.
4. Complete the worksheet for consolidated financial statements for 2012.

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