X Co. acquired 75% of Y Co. on January 1, Year 1, when Y Co. had common shares worth $100,000 and retained earnings of $70,000. The acquisition differential was allocated as follows on this date:
Inventory............ $ 60,000
Equipment (15-year life) ...... 45,000
Total acquisition differential...... $105,000
Since this date the following events have occurred:
Year 1
• Y Co. reported a net income of $130,000 and paid dividends of $25,000.
• On July 1, X Co. sold land to Y Co. for $112,000. This land was carried in the records of X Co. at $75,000.
• On December 31, Year 1, the inventory of X Co. contained an intercompany profit of $30,000. • X Co. reported a net income of $400,000 from its own operations.
Year 2
• Y Co. reported a net loss of $16,000 and paid dividends of $5,000.
• Y Co. sold the land that it purchased from X Co. to an unrelated company for $130,000.
• On December 31, Year 2, the inventory of Y Co. contained an intercompany profit of $12,000.
• X Co. reported a net income from its own operations of $72,000.
Required:
Assume a 40% tax rate.
(a) Prepare X Co.’s equity method journal entries for each of Years 1 and 2.
(b) Calculate consolidated net income attributable to X Co.’s shareholders for each of Years 1 and 2.
(c) Prepare a statement showing the changes in non-controlling interest in each of Years 1 and 2.
(d) Now assume that X Co. is a private company, uses ASPE, and chooses to use the equity method. Calculate the balance in the Investment in Y Co. account as at December 31, Year 2.