Question

Washington Company purchased 100% of Jefferson Company on January 1, 20X1 for $1,000,000 when the book value of Jefferson was $750,000 with the excess caused by Equipment that was undervalued by $50,000 and Goodwill. The Equipment had a four year life. In 20x2 Washington sold inventory to Jefferson still in the inventory of Jefferson at year end with a profit of $3,000. During 20X3, Washington sold to Jefferson inventory costing $30,000 for $40,000. At December 31, 20x3, Jefferson still had $6,000 cost to Jefferson of that inventory in its inventory. Jefferson reported $50,000 of income in 20X3 and paid dividends of $10,000.

a. Prepare a schedule of Excess of Cost over Book Value on the date of purchase. Determine the annual amortization expense in this schedule.
b. For 20X3, prepare on the books of Washington the full equity method journal entries.

Answer 1

To prepare a schedule of Excess of Cost over Book Value on the date of purchase, calculate the excess of $250,000 and the annual amortization expense of $12,500. For 20X3, the full equity method journal entries on the books of Washington would include the cost of sales, sales, cost of sales inventory adjustment, and the investment in Jefferson.

Step-by-step explanation:

To prepare a schedule of Excess of Cost over Book Value on the date of purchase:

1. The book value of Jefferson was $750,000. Washington purchased Jefferson for $1,000,000, resulting in an excess of $250,000 ($1,000,000 - $750,000).
2. The excess was caused by Equipment that was undervalued by $50,000 and Goodwill. Since the Equipment had a four-year life, the annual amortization expense would be $12,500 ($50,000 / 4).

For 20X3, the full equity method journal entries on the books of Washington would be as follows:

• Debit: Inventory - Cost of Sales - $30,000
• Credit: Sales - $30,000
• Debit: Cost of Sales - $30,000
• Credit: Inventory - Cost of Sales - $30,000
• Debit: Investment in Jefferson - Equity in Earnings - $14,000 ([$40,000 - $30,000] / [$40,000 - $6,000] * $14,000)
• Credit: Equity in Earnings - $14,000