Question

Paper Company acquired 100 percent of Scissor Company's outstanding common stock for $370,000 on January 1, 20X8, when the book value of Scissor's net assets was equal to $370,000. Accumulated depreciation on this date was $24,000. Paper uses the equity method to account for investments. The following trial balance summarizes the financial position and operations for Paper and Scissor as of December 31, 20X9: (Assume the company prepares the optional Accumulated Depreciation Elimination Entry.)

Paper Company Scissor Company
Debit Credit Debit Credit
Cash $323,000 $116,000
Accounts Receivable 165,000 97,000
Inventory 193,000 115,000
Investment in Scissor Stock 515,000 0
Lad 250,000 125,000
Buildings and equipment 875,000 250,000
Cost of Goods Sold 278,000 178,000
Depreciation Expense 65,000 12,000
Selling & Administrative Expense 312,000 58,000
Dividends Declared 90,000 30,000
Accumulated Depreciation $630,000 $48,000
Accounts Payable 85,000 40,000
Bonds Payable 150,000 100,000
Common Stock 625,000 250,000
Retained Earnings 498,000 188,000
Sales 880,000 355,000
Income from Scissor 107,000 0
Total $2,975,000 $2,975,000 $981,000 $981,000
Required: a. Prepare any equity method journal entry(ies) related to the investment in Scissor Company during 20X9.

b. Prepare a consolidation worksheet for 20X9

Answer 1

Paper (Holding) Company

a) Journal Entries, related to the investment in Scissor Company:

Date Description Debit Credit

Dec. 31 Investment in Scissors $107,000

Income from Scissors $107,000

To record 100% share from Scissors' income.

Dec. 31 Cash $30,000

Investment in Scissors $30,000

To record 100% share of dividend declared.

b) Consolidation Worksheet:

Paper Company Scissor Company Consolidated

Debit Credit Debit Credit Debit Credit

$'000 $'000 $'000 $'000 $'000 $'000

Cash 323 116 439

Accounts Receivable 165 97 262

Inventory 193 115 308

Investment in Scissor 515 0

Land 250 125 375

Buildings & equipment 875 250 1,125

Cost of Goods Sold 278 178 456

Depreciation Expense 65 12 77

Selling & Administrative 312 58 370

Dividends Declared 90 30 90

Accumulated Depreciation 630 48 678

Accounts Payable 85 40 125

Bonds Payable 150 100 250

Common Stock 625 250 625

Retained Earnings 498 188 498

Sales 880 355 1,235

Income from Scissor 107

Total $2,975,000 $2,975,000 $981,000 $981,000

NB: The Cash balance for Paper was overstated by $91,000. This is why the totals cannot add up, even in the question. But, I have used the figure of $323,000 as provided, hoping that you will make the necessary changes as you discover this observation.

Step-by-step explanation:

1) Eliminated Entries:

Debit Credit

Investment in Scissor 515,000

Common Stock 250,000

Retained Earnings 188,000

Income from Scissor 107,000

Dividend Declared 30,000

Total 545,000 545,000

2. Consolidation accounting is the process of combining the financial results of several subsidiary companies into the combined financial results of the parent company, used when a parent entity owns more than 50% of the shares of another entity (called a subsidiary).