(XYZ) Co. purchased 75% of (ABC) Co. Company on January 1, Year 6, for $630,000, when the statement of financial position for (ABC) Co. showed common shares of $480,000 and retained earnings of$180,000. On that date, the inventory of (ABC) Co. was undervalued by $50,000, and a patent with an estimated remaining life of five years was overvalued by $74,000.

(ABC) Co. reported the following subsequent to January 1, Year6:

	Profit (Loss)			Dividends
Year 6	$	112,000		$	33,000
Year 7		(43,000	)		18,000
Year 8		98,000			48,000

A test for goodwill impairment on December 31, Year 8, indicated a loss of $20,100 should be reported for Year 8 on the consolidated income statement. (XYZ) Co uses the cost method to account for its investment in (ABC) Co. and reported the following for Year 8 for its separate-entity statement of changes in equity:

Retained earnings, beginning	$	580,000
Profit		280,000
Dividends		(62,000	)
Retained earnings, end	$	798,000

Required:

a.            Prepare the cost method journal entries of (XYZ) Co. for each year.

b.            Compute the following on the consolidated balances for the year ended December 31, Year 8:

1.            Goodwill

2.            Non-controlling interest on the statement of financial position

3.            Retained earnings, beginning of year

4.            Profit attributable to (XYZ) Co.’s shareholders

5.            Profit attributable to non-controlling interest

c.             Now assume that (XYZ) Co. is a private entity, uses ASPE, and chooses to use the equity method to report its investment in (ABC) Co. Determine the investment in (ABC) Co. at December 31, Year 8.

Answer rating: 100% (QA)

a Year 6 Dr Investment in ABC Co 630000 Cr Cash 630000 Year 7 Dr Dividend Income 33000 Cr Dividend Receivable 33000 Year 8 Dr Dividend Receivable 6200... View the full answer