Problem - On January 1, 20X1, LGM Company purchased 80% of the outstanding common stock of MEL Company for $296,000. On this date, the book value of MEL's net asset was equal to $370,000. LGM uses the equity method to account for investments. Below is the trial balance for both LGM and MEL as of December 31, 20X1
|
LGM
|
MEL
|
|
Cash
|
191,000
|
46,000
|
|
Accounts Receivable
|
140,000
|
60,000
|
|
Inventory
|
190,000
|
120,000
|
|
Investment in MEL
|
350,400
|
0
|
|
Land
|
250,000
|
125,000
|
|
Buildings & Equipment
|
875,000
|
250,000
|
|
Cost of Goods Sold
|
250,000
|
155,000
|
|
Depreciation Expense
|
65,000
|
12,000
|
|
Selling & Adm. Expense
|
280,000
|
50,000
|
|
Dividends Declared
|
80,000
|
25,000
|
|
Accumulated Depreciation
|
565,000
|
36,000
|
|
Accounts Payable
|
77,000
|
27,000
|
|
Bonds Payable
|
250,000
|
100,000
|
|
Common Stock
|
625,000
|
250,000
|
|
Retained Earnings
|
280,000
|
120,000
|
|
Sales
|
800,000
|
310,000
|
|
Income from MEL
|
74,400
|
0
|
Required:
1. Prepare all necessary journal entries to record the investment in MEL.
2. Prepare the book value calculations.
3. Prepare all necessary elimination entries for the consolidating worksheet of December 31, 20X1.
4. Complete the consolidating worksheet for December 31, 20X1.
5. Prepare the following financial statements:
a. Balance Sheet
b. Income Statement
6. Determine the amount of total revenue, total expense and net income to be reported as of December 31, 20X1 under the following consolidation alternatives:
a. Parent Company Concept
b. Economic Entity Concept