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Assume that on 1/1/20 Grace acquired 80% of Smith for $440,000 when Smith's equity included $200,000...

Assume that on 1/1/20 Grace acquired 80% of Smith for $440,000 when Smith's equity included $200,000 of retained earnings and $200,000 of capital stock. An appraisal of Smith's assets could not identify any misvalued assets. During 2020, Smith earned $100,000 and paid $30,000 of dividends. Grace uses the cost/initial value method to account for its investment in Smith. Assume that Grace is consolidating the trial balances of both companies on 12/31/20. What worksheet consolidation entries should be made?

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Answer #1

In cost or initial value method the investment remains at initially recorded cost , that is at $ 4,40,000 and dividend income received as cash recognised in income account as dividend revenue.

No adjustments are recorded in the investment account for current year operations, dividend paid by the subsidiary or amortization of purchase price allocations.

Therefore investment in Smith recorded in assets in financial statements also the dividend income 80%*30000=$24,000 recognised in the revenue account.

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