Question

Pell Company purchased 75% of the stock of Silk Company on January 1, 2007, for $1,860,000, an amount equal to $60,000 in excess of the book value of equity acquired. All book values were equal to fair values at the time of purchase (i.e., any excess payment relates to subsidiary goodwill). On the date of purchase, Silk Company's retained earnings balance was $200,000. The remainder of the stockholders' equity consists of no-par common stock. In 2011, Silk Company declared dividends in the amount of $40,000 and reported net income of $160,000. The retained earnings balance of Silk Company on December 31, 2010, was $640,000. No impairment of goodwill was recognized between the date of acquisition and December 31, 2011.

Required:

Prepare in general journal form the work paper entries that would be made in the preparation of consolidated elements work paper on December 31, 2011, assuming that

1. Pell Company uses the equity method to record its investment.
2. Pell Company uses the cost method to record its investment.

Please only attempt if you can solve the question with a proper explanation. Please do not copy from Chegg.

Answer 1

Answer :

1. Pell company uses the equity method to record it's investment.

Date	Account name	Debit	Credit
1/1/2007	Investment in silk company	1,800,000
	Cash		1,800,000
1/1/2007	Goodwill - silk company	60,000
	Cash		60,000
1/1/2011	Cash	30,000
	Dividend revenue		30,000
	(40,000 x 75%)
1/1/2011	Investment in silk company	120,000
	Investment income - Silk company		120,000
	($160,000 x 75%)