Question

1- Utes acquires 90% of Cougar on January 1^st 20X1 for $810K (the underlying book value). At the time of the acquisition Cougar’s Retained Earnings was $400K and Common Stock was $500K. During the year, Ute sold $450,000 of inventory to Cougar.   The inventory originally cost Ute $270,000.   At the end of the year, Cougar had $90,000 of that inventory on hand.   The remainder had been sold to an outside party. Including the sale of the intercompany inventory to an outside party, Cougar had net income of $250K and no dividends were paid during the year. At the date of acquisition Ute’s accumulated depreciation was $35K and Cougar’s was $25K.

a- Ute accounts for Cougar under the fully adjusted equity method. Prepare all equity method adjustments that will be necessary for the entire year ending December 31, 20X1. (5pts)

b- Prepare all Elimination Entries at December 31, 20X1 (8pts)

c) What is the consolidated ending inventory at December 31st 20X1 (2pts)

Answer 1

A	Total Purchases for Ute	$        270,000
B	Total Sales for Ute	$        450,000
C	Profit from Intercompany Sales (B-A)	$        180,000
D	Profit Margin (C/B)	40%
E	Unsold Inventory	$            90,000
F	Profit Margin on Unsold Inventory (E*D)	$            36,000

a) Adjustments

Original Investment (at cost)	$        810,000
(+) Share in Net Income of Cougar (90% * $250K)	$        225,000
(-) Unrealized profits	$          (36,000)
Carrying value of Investments	$        999,000

Net Income of Ute ($450,000-$270,000)	$        180,000
(+) Share in Net Income of Cougar (90% * $250K)	$        225,000
(-) Unrealized profits	$          (36,000)
Net Income to be reported	$        369,000

b) Elimination entries

Date	Particulars	Dr Amount	Cr Amount
Dec 31, 20X1	Sales	$        450,000
	Cost of Goods Sold		$        414,000
	Inventory		$            36,000
Dec 31, 20X1	Income from Cougar	$            36,000
	Investment in Cougar		$            36,000

c) Consolidated Ending Inventory

A	Ending Inventory of Utes	$                     -
B	Ending Inventory of Cougar	$            90,000
C	(-) Unrealized profits	$          (36,000)
D	Consolidated Ending Inventory (A+B+C)	$            54,000

I hope this helps. :)