Question

Stick Corporation is a wholly owned subsidiary of Point Corporation. Point acquired ownership of Stick on January 1,20×3, for $28,000 above Stick's reported net assets. At that date, Stick reported common stock outstanding of $60,000 and retained eamings of $90,000. The differential is assigned to equipment with an economic life of seven years at the date of the business combination. Stick reported net income of $30,000 and paid dividends of $12,000 in 20×3. Required: a. Prepare the journal entries recorded by Point Corporation during 20×3 on its books if Point accounts for its investment in 5 tick using the equity method. b. Prepare the consolidating entries needed at December 31, 20x3, to prepare consolidated financial statements. Complete this question by entering your answers in the tabs below. Prepare the consolidating entries needed at December 31, 20x3, to prepare consolidated financial statements. Note: If no entry is required for a transaction/event, select "No journal entry required" in the first account field,

Answer 1

Point Corporation records investment in Stick using the equity method, recognizing a share of profits and dividends. Consolidating entries at year-end eliminate intercompany balances and amortize differentials assigned to equipment's economic life for consolidated financial statements.

Step-by-step explanation:

During 20x3, Point Corporation must record its investment in Stick Corporation using the equity method. Under this method, Point will recognize its share of Stick’s profits and any dividends received as adjustments to the carrying amount of the investment. The journal entries on Point's books for the year 20x3 would include:

• Recording its share of Stick's net income.
• Recording the dividends received from Stick.

At the end of the year, Point Corporation will need to make consolidating entries for the preparation of consolidated financial statements. These entries would eliminate intercompany balances and recognize the excess payment over Stick's net assets (differential) and its amortization. This adjustment is based on the economic life of the equipment to which the differential was assigned, which is seven years.

The specific entries would include:

1. Eliminating the investment in Stick and the corresponding equity amounts.
2. Recording the amortization of the differential related to the equipment.
3. Eliminating Stick's dividends paid.

It is important to note that the exact entries would require additional information such as the amount of income from Stick recorded by Point and any intercompany transactions that might need to be eliminated.