On 1/1/17 Big Co acquired 80% of Little Co. common stock for $480,000. The fair value of the NC Interest on that date was $120,000. Little’s book value on that date was $500,000. Little’s assets and liabilities had fair values equal to book value except:

Inventory, FIFO basis, undervalued by $10,000

Land, overvalued by $10,000

Equipment, 10 year life, undervalued by $40,000

Bonds payable, 3 year remaining life, overvalued by $6,000

In 2017, Little reported earnings of $60,000 and paid dividends of $20,000.

In 2018, Big determined that the correct goodwill figure for their Little acquisition should be $25,000. In 2018, Little reported earnings of $100,000 and paid dividends of $40,000.

Required:

1. Prepare appropriate equity method and elimination entries for 2017 and 2018, and complete the attached consolidation worksheets.

1. Ignoring the information in the consolidation worksheets, prepare the elimination entries that would be needed if Big used the Cost method to account for their investment in Little.

2017	Big	Little	dr	cr	Consolidated
Sales	400,000	350,000
Cost of goods sold	200,000	200,000
Depreciation expense	40,000	30,000
Operating expenses	100,000	50,000
Interest expense	15,000	10,000
Investment income	35,200
Consolidated income	80,200	60,000
Income to NC Interest
Income to Controlling interest
Beginning R/E	300,000	350,000
Add: Income	80,200	60,000
Less: Dividends	50,000	20,000
Ending Retained earnings	330,200	390,000
Cash	40,000	15,000
Receivables	70,000	40,000
Inventory	100,000	80,000
Investment in Little	499,200
PPE, net	400,000	300,000
Land	200,000	150,000
In-process R&D
Other Assets	11,000	255,000
Goodwill
Accounts payable	40,000	50,000
Bonds payable	400,000	250,000
Discount on bonds
Common Stock	250,000	50,000
Additional paid in capital	300,000	100,000
Retained earnings	330,200	390,000
NC Interest

2018	Big	Little	dr	cr	Consolidated
Sales	540,000	380,000
Cost of goods sold	350,000	190,000
Depreciation expense	60,000	30,000
Operating expenses	80,000	50,000
Impairment loss
Interest expense	15,000	10,000
Investment income	52,000
Consolidated income	87,000	100,000
Income to NC Interest
Income to Controlling interest
Beginning R/E	330,200	390,000
Add: Income	87,000	100,000
Less: Dividends	50,000	40,000
Ending Retained earnings	367,200	450,000
Cash	40,000	30,000
Receivables	70,000	80,000
Inventory	100,000	70,000
Investment in Little	519,200
PPE, net	340,000	140,000
Land	200,000	150,000
In-process R&D
Other Assets	48,000	355,000
Goodwill
Accounts payable	50,000	25,000
Bonds payable	350,000	200,000
Discount on bonds
Common Stock	250,000	50,000
Additional paid in capital	300,000	100,000

Answer rating: 100% (QA)

To prepare the appropriate equity method and elimination entries for 2017 and 2018 we need to consider the acquisition of Little Co by Big Co and the ... View the full answer