Problem 4-12 – Part B:

In year 1, the original investment was 180 000, and by the end of year 1
the investment was 184 500. And NCI by end of year 1 was 20 500.
And RE S in year 1 was 25 000.
Balances at end of year 2:
Parker Sid
Cash $ 70,000 $ 20,000
Accounts receivable 60,000 30,000
Inventory 40,000 30,000
Investment in Sid 193,500 -
Plant and equipment 125,000 90,000
Land 48,500 45,000
Dividends declared 20,000 15,000
Cost of goods sold 160,000 65,000
Operating expenses 35,000 20,000
Total debits 752 000 320 000

Accounts payable $ 16,500 $ 16,000

Other liabilities 15,000 24,000
Common stock 200,000 120,000
Other contributed capital 70,000 20,000
Retained earnings 168,000 ?
Sales 260,000 110,000
Equity in subsidiary income 22,500 -
Total credits

Required under (equity method):

1. Prepare the entries for year 2
2. Prepare the elimination entries for year 2
3. Prepare the consolidated statements for year 2
RE in S year 2 = from statements prepared in year 1 : 30 000

Or REs y2 = RE s in y1 + NI of S in y1 – Div of S in year 1 = 25 000 + 20 000 -15 000 = 30 000

1. Entries in year 2 (equity method)

Entry to recognize P share in S income

Investment 22 500
Equity in S income 22 500
(S income * 90%) = (110 – 20 – 65) * 0.9 = 25 000 * 0.9 = 22 500

Entry to recognize P share in S dividend

Cash
Investment
(S dividend * 90%) = (15 000 * 0.9) = 13 500

 If the amount of investment by end of year 2 is to be computed:

Investment end of y1 + 22 500 – 13 500 = 184 500 + 22 500 – 13 500 = 193 500

2. Elimination Entries in year 2 (equity method)

Elimination of P share in S income

Equity in S income 22 500
Investment 22 500

Entry to recognize P share in S dividend

Investment 13 500
Dividend declared 13 500
(S dividend * 90%) = (15 000 * 0.9) = 13 500

Basic elimination
CS s 120 000
OCCs 20 000
REs y2 30 000(was 25 000 in y1)
Land 35 000
Investment (beg of y2) 184 500*
NCI (beg of y2) 20 500**
*If not given = investment in y1 + (difference in S RE * 0.9) = 180 000 + (5000*0.9)
** If not given = NCI in y1 + (difference in S RE * 0.1) = 20 000 + (5000*0.1)

Since we are using equity method, no need to prepare the elimination entry needed in cost
method:
Investment
RE p
3. Statements in year 2, similar to statements in y1, but with changes in numbers according to the Y2
values.