Problem

Major Corporation acquired 90 percent of Lancaster Company's voting common stock on January 1, 20X1, for $507,600. At the time of the combination, Lancaster reported common stock outstanding of $127,000 and retained earnings of $382,000, and the fair value of the noncontrolling interest was $56,400. The book value of Lancaster's net assets approximated market value except for patents that had a market value of $55,000 more than their book value. The patents had a remaining economic life of ten years at the date of the business combination. Lancaster reported net income of $75,000 and paid dividends of $21,000 during 20X1.

Required:

a. What balance did Major report as its investment in Lancaster at December 31, 20X1, assuming Major uses the equity method in accounting for its investment?

b. Prepare the consolidation entry or entries needed to prepare consolidated financial statements at December 31, 20X1.