Final answer:
Puffin's equity in the net income of Sunset Coast for 2016 is $70,000 after adjustments for amortization and depreciation. The balance in the Investment in Sunset Coast account would be $3,470,000 at the end of 2016 following the equity method. Working paper eliminating entries would reverse equity method entries and eliminate investment and equity accounts.
Step-by-step explanation:
Puffin's 2016 equity in net income of Sunset Coast is calculated by adjusting Sunset Coast's reported net income to account for the excess book value adjustments made at the acquisition date. Since Puffin uses the complete equity method, the net income reported by Sunset Coast will be adjusted for the amortization of the identified intangible assets over 20 years, and the depreciation of plant assets over 10 years.
The income adjustment for amortization of intangible assets is the excess cost over book value (excluding inventory and plant assets overvaluation), which is $600,000, amortized straight-line over 20 years, yielding an annual amortization of $30,000. The depreciation adjustment for plant assets is $1,000,000 overvalued and divided by a 10-year life, hence an adjustment of $100,000 annually. Therefore, for 2016, the adjusted equity in net income would be Sunset Coast's reported net income of $200,000 minus $30,000 (intangible assets amortization) minus $100,000 (plant asset depreciation), resulting in $70,000.
To compute the balance in the Investment in Sunset Coast account at the end of 2016, we begin with the initial investment and then add Puffin's share of Sunset Coast's net income adjusted for the excess book value amortizations and depreciations, and subtract any dividends received. The initial investment is $3,500,000. Over the three years, the equity in net income totals $70,000 each year after adjustments and 50% of that income has been distributed as dividends, which is $100,000 annually. Thus:
The revised balance would be Initial Investment + Adjusted Equity in Net Income - Dividends Received, which for 2016 is $3,500,000 + $70,000 - $100,000, equating to $3,470,000.
The eliminating entries in preparation for the consolidation at December 31, 2016, would involve reversing the equity method entries recorded by Puffin and eliminating the investment and equity accounts. The specific entries would depend on the intercompany transactions and the financial statement presentation choices.