Question

Amber Corporation reported the following summarized balance sheet data on December 31, 20X6:

Assets $600,000 Liabilities $100,000
Common Stock 300,000 Retained Earnings 200,000
Total $600,000 Total $600,000
On January 1, 20X7, Purple Company acquired 100 percent of Amber’s stock for $500,000. At the acquisition date, the book values and fair values of Amber’s assets and liabilities were equal. Amber reported net income of $50,000 for 20X7 and paid dividends of $20,000.
Required:
A. Give the journal entries recorded by Purple on its books during 20X7 if it accounts for its investment in Amber using the equity method.
B. Give the elimination entries needed on December 31, 20X7, to prepare consolidated financial statements.

Answer 1

A. Give the journal entries recorded by Purple on its books during 20X7 if it accounts for its investment in Amber using the equity method.

January 1, 20x7, investment on Amber Corporation

Dr Investment on Amber Corporation 500,000

Cr Cash 500,000

Date, 20x7, dividends distributed by Amber Corporation

Dr Cash 20,000

Cr Investment on Amber Corporation 20,000

December 31, 20x7, Amber Corporation reports net income

Dr Investment on Amber Corporation 50,000

Cr Investment revenue 50,000

B. Give the elimination entries needed on December 31, 20X7, to prepare consolidated financial statements.

Since there are no intercompany sales reported, the only consolidation entry necessary is to eliminate investment account:

December 31, 20x7, consolidation entry

Dr Common stock 300,000

Dr Retained earnings 230,000

Cr Investment on Amber Corporation 530,000