Chapter 4, Problem 4.37AP

a.

To determine

Introduction: Investment is the asset that is acquired for the generation of income or return in the long run. Investments are used to create capital for future utilization. The return obtained from investments is used in operations of the business.

To prepare: Journal entries that Company M would record for consolidation to prepare a consolidated financial statement.

Explanation of Solution

Record elimination of beginning investment balance:

Date	Account	Debit ($)	Credit($)
20X8	Common Stock Company R	60,000
	Retained earnings	40,000
	Income from Company R	24,000
	Dividend income		16,000
	Investment in company R		108,000
	(To record elimination of beginning investment balance)

Table (1)

• Common stock Company R is equity and it is decreased by $60,000. Therefore, Common stock Company R account is debited with $60,000.

• Retained earnings are equity and it is decreased by $40,000. Therefore, Retained earnings account is debited with $40,000.

• Income from Company R is an income and it is decreased by $24,000. Therefore, income from Company R account is debited with $24,000.

• Dividend income is an income and it is increased by $16,000. Therefore, Dividend income account is credited with $16,000.

• Investment in Company R is an asset and it is decreased by $108,000. Therefore, Investment in Company R account is credited with $108,000.

Record amortizes excess value:

Date	Account	Debit ($)	Credit($)
20X8	Depreciation	2,000
	Goodwill Impairment Loss	5,500
	Income from Company R		7,500
	(To record amortize excess value)

Table (2)

• Depreciation is an expense and it is increased by $2,000. Therefore, Depreciation account is debited with $2,000.

• Goodwill Impairment Loss is an expense and it is increased by $5,500. Therefore, Goodwill Impairment Loss account is debited with $5,500.

• Income from Company R is an income and it is increased by $7,500. Therefore, income from Company R account is credited with $7,500.

Record amortizes excess value:

Date	Account	Debit ($)	Credit($)
20X8	Building & Equipment	20,000
	Goodwill	2,500
	Accumulated depreciation		2,000
	Income from Company R		20,500
	(To record amortize excess value)

Table (3)

• Building & Equipment is an asset and it is increased by $20,000. Therefore, Building & Equipment account is debited with $20,000.

• Goodwill is an asset and it is increased by $2,500. Therefore, Goodwill account is debited with $2,500.

• Accumulated Depreciation is a current liability and it is increased by $2,000. Therefore, the Accumulated Depreciation account is credited with $2,000.

• Income from Company R is an income and it is increased by $20,500. Therefore, income from Company R account is credited with $20,500.

Record optional accumulated depreciation:

Date	Account	Debit ($)	Credit($)
20X8	Accumulated depreciation	30,000
	Building & Equipment		30,000
	(To record optional accumulated depreciation)

Table (4)

• Accumulated Depreciation is a current liability and it is decreased by $30,000. Therefore, the Accumulated Depreciation account is debited with $30,000.

• Building & Equipment is an asset and it is decreased by $30,000. Therefore, Building & Equipment account is credited with $30,000.

b.

To determine

Introduction: Investment is the asset that is acquired for the generation of income or return in the long run. Investments are used to create capital for future utilization. The return obtained from investments is used in operations of the business.

To prepare: The three-part worksheet as of December 31, 20X8.

Explanation of Solution

Preparation of three-part worksheet:

Amount in ($)

Company M Consolidation Work paper December 31, 20X5
Particulars	Company M	Company R	Elimination		Consolidation
Income Statement			Debit	Credit
Sales	260,000	180,000			440,000
Cost of Goods Sold	(125,000)	(110,000)			(235,000)
Wages Expenses	(42,000)	(27,000)			(69,000)
Depreciation	(25,000)	(10,000)	2,000		(37,000)
Interest	(12,000)	(4,000)			(16,000)
Other expense	(13,500)	(5,000)			(18,500)
Impairment loss			5,500		(5,500)
Income from Roller Company	16,500		24,000	7,500
Net Income	59,000	24,000	31,500	7,500	59,000
Statement of Retained earnings
Beginning balance	102,000	40,000	40,000		102,000
Net Income	59,000	24,000	31,500	7,500	59,000
Dividend Declared	(30,000)	(16,000)		(16,000)	(30,000)
Ending Balance	131,000	48,000	71,500	23,500	131,000
Balance Sheet
Cash	19,500	21,000			40,500
Accounts Receivables	70,000	12,000			82,000
Inventory	90,000	25,000			115,000
Land	30,000	15,000			45,000
Buildings and equipment	350,000	150,000	20,000	30,000	490,000
Accumulated Depreciation	(145,000)	(40,000)	30,000	2,000	(157,00)
Investment in Company R			2,500		2,500
Total assets	543,000	183,000	52,500	160,500	618,000
Accounts payable	45,000	16,000			61,000
Wages Payable	17,000	9,000			26,000
Notes payable	150,000	50,000			200,000
Common stock	200,000	60,000	60,000		200,000
Retained earnings	131,000	48,000	71,500	23,500	131,000
Total liabilities	543,000	183,000	131,500	23,500	618,000

Table (1)