1. On January 1, 2020, Parent sold equipment to Sub for $55,000 cash. It had originally cost...

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Question:

1. On January 1, 2020, Parent sold equipment to Sub for $55,000 cash. It had originally cost Parent $35,000 and had been depreciated for 3 years of its estimated 7-year life, at the date of sale. Both companies pay income tax at the rate of 30%.

Required:

Prepare the 2020 working paper elimination journal entries for the intercompany sale of equipment on January 1, 2020.

2. On January 1, 2020, Great Ltd. purchased 25% of the outstanding voting shares of Compact Inc. for $345,000. On this date, the net assets of Compact Inc. had a book value of $450,000. On that date, the accounts receivable of Compact was overvalued by $5,000, the accounts payable was undervalued by $7,000, and the equipment with a remaining useful life of 10 years from the acquisition date, was undervalued by $25,000. The equipment is being depreciated on a straight-line basis. Compact reported a net loss of $19,000 for 2020 and a net income of $37,000 for 2021 respectively. Compact also paid dividends of $12,000 and $30,000 for 2020 and 2021 respectively. In 2021, there was a goodwill impairment loss equal to 18% of the goodwill created at the acquisition date.

Required:

a) Prepare the journal entries for 2020 and 2021.

b) Prepare the journal entry, if necessary, if the recoverable amount of the 25% investment in Compact was $270,000 on January 5, 2022, and the drop was considered a permanent decline. If no journal entry is required, briefly explain why.