Assume Photo Corporation Purchased 55 Percent Of The Outstan

Assume Photo Corporation Purchased 55 Percent Of The Outstanding Stock

Assume Photo Corporation purchased 55 percent of the outstanding stock of Shutter Company (i.e., replace A75 percent@ with A55 percent@ in the first line of the problem). Also assume that Photo Corporation paid $385,000 cash for the stock instead of issuing $500,000 par bonds payable. On that date, the buildings and equipment have a remaining life of 10 years, the patent has a remaining life of 5 years, and the fair value of noncontrolling interest is $315,000. During 20X8, Shutter Company reported net income of $170,000 and paid dividends of $60,000. On December 31, 20X8, Shutter Corporation owed $9,000 on account to Photo Corporation and calculated that $15,000 of goodwill had been impaired.

Part 1: Journalize the equity method entries to record the investment on the books of Photo Corporation during 20X8. Part 2: Journalize the elimination entries that would need to be prepared by Photo Corporation to report consolidated financial statements on December 31, 20X8. Hint: make sure you use the same account titles used by the two firms. For example, if you use Accounts Receivable in Elimination I that would result in a deduction because neither firm uses that account exact title.

Paper For Above instruction

In 20X8, Photo Corporation’s investment in Shutter Company required careful accounting to reflect the ownership stake, the income earned, dividends received, and goodwill impairments, along with preparing consolidated financial statements. The following journal entries provide a comprehensive account of these activities guided by the equity method and consolidation procedures.

Part 1: Equity Method Journal Entries in Photo Corporation

Under the equity method, the investment is initially recorded at cost. Here, Photo Corporation paid $385,000 for a 55% stake in Shutter Company, which is the initial investment costRecorded as:

Investment in Shutter Company       385,000
Cash                                      385,000

This entry recognizes the cash outflow for the purchase of stock.

During 20X8, Shutter reported net income of $170,000. Under the ownership of 55%, Photo Corporation's share of income is calculated as:

Share of net income = $170,000 x 55% = $93,500

So, the journal entry to recognize this income is:

Investment in Shutter Company       93,500
Equity in earnings of Shutter             93,500

Dividends paid by Shutter reduce the carrying amount of the investment. Dividends of $60,000 are received; Photo's share is:

Dividends received = $60,000 x 55% = $33,000

The journal entry is:

Cash                                    33,000
Investment in Shutter                     33,000

This reflects the decrease in the investment account due to dividends received.

Part 2: Consolidation Elimination Entries as of December 31, 20X8

Consolidation entries are necessary to eliminate intra-group transactions and record fair value adjustments. Important considerations include the fair value of the noncontrolling interest (NCI), the recognition of identifiable assets, and goodwill impairment.

1. Eliminate Investment in Shutter and Recognize Noncontrolling Interest

Investment in Shutter Company                            385,000
Noncontrolling Interest (NCI)                              315,000
Cash                                                               385,000
Gain on Purchase (if any)                                  [not specified]
Goodwill (calculate if necessary)                        [adjusted for impairment and fair value differences]

This entry removes the investment and records NCI based on fair value. Since there is no specific goodwill calculation provided, assume initial goodwill is calculated as the excess of purchase price over fair value of identifiable net assets, adjusted for impairment.

2. Adjust for Fair Value and Goodwill Impairment

Fair value adjustments to identifiable assets:
Buildings and Equipment (remaining life 10 years)
Patents (remaining life 5 years)
[Debit or credit their fair value differences accordingly]
Recognize impairment loss:
Goodwill impairment                                           15,000
Goodwill                                                          15,000

This reflects the impairment of goodwill, reducing its carrying amount by $15,000.

3. Record Share of Net Income and Dividends at the Consolidation Level

Eliminate intra-group income:
Share of Shutter's Net Income (55% of $170,000)                   93,500
Investment in Shutter                                                      93,500
Eliminate intra-group dividends receivable:
Dividends payable from Shutter to Photo (55% of $60,000)    33,000
Dividends Receivable (or appropriate account)                  33,000

These entries align with consolidation principles by eliminating intra-group profits, income, and receivables.

4. Adjust for Intercompany Account Payables

Accounts Payable (Shutter owes Photo)                     9,000
Accounts Receivable (Photo's receivable from Shutter)        9,000

This entry eliminates reciprocal account balances on consolidation.

Conclusion

These journal entries ensure that Photo Corporation's consolidated financial statements accurately reflect the full economic interests, asset valuations, and intra-group transactions. Proper handling of equity method income recognition, intra-group eliminations, fair value adjustments, and impairment of goodwill is crucial to delivering transparent and compliant consolidated financial statements.

References

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