Question

In January 1, 2014 James Company has acquired 85% of LuLu Company for                      $2,125,000 on the date of the acquisition the subsidiary had retained earnings $650,000 and a capital of $1,100,000.

Separate balance sheet as of 1 January 2014 for James and its Subsidiary.

Description	Parents	Subsidiary
Cash	60,000	35,000
Receivable	35,000	40,000
Land	1,550,000	550,000
Property	1,500,000	1,200,000
Investment in Subsidiary	2,125,000	-
Total asset	5,270,000	1,825,000
Account payable	50,000	60,000
Other liabilities	67,000	15,000
Capital stock	3,900,000	1,100,000
Retained earnings	1,253,000	650,000
Total equity and liabilities	5,270,000	1,825,000

Q-Using the cost method, record the elimination entry required for consolidation as of January 1, 2014.

Answer 1

Dear Student,

Please find below entry for Elimination:

Capital Stock … Dr	1100000
Retained Earnings … Dr	650000
Goodwill … Dr	637500
To Non-Controling Interest		262500
To Investment in Subsidiary		2125000

Capital Stock and Retained Earnings are taken at Book Value.

Investment in Subsidiaty is appearing in the question as well as in the balance sheet.

Goodwill is calculated as follows:

BV of Capital Stock = 1100000

BV of Retained Earnings = 650000

Total BV of Capital = 1750000

Shareholding @ 85% = 1487500

Cost of Investment = 2125000

Cost of Investment is greater than Shareholding. Hence Debit Difference or Goodwill = 2125000 - 1487500 = 637500

Non-Controling or Minority Interest is calculated as follows:

Total BV of Capital = 1750000

Minority @ (100-85) i.e. 15% = 262500

Dear Student- Please let me know if you need any clarifications in the above answer.