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Question

Errant Inc. purchased 100% of the outstanding voting shares of Grub Inc. for $200,000 on January 1, 2019. On that

date, Grub Inc. had common shares and retained earnings worth $100,000 and $60,000, respectively. Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Grub's fair market values on the date of acquisition are disclosed below:


Errant Inc.

Grub Inc.

Grub Inc.

 

(carrying value)

(carrying value)

(fair value)

Cash

$120,000

$76,000

$76,000

Accounts Receivable

$80,000

$40,000

$40,000

Inventory

$60,000

$34,000

$50,000

Equipment (net)

$400,000

$80,000

$70,000

Trademark

 

$70,000

$84,000

Total Assets

$660,000

$300,000

 

Current Liabilities

$180,000

$80,000

$80,000

Bonds Payable

$320,000

$60,000

$64,000

Common Shares

$90,000

$100,000

 

Retained Earnings

$70,000

$60,000

 

Total Liabilities and Equity

$660,000

$300,000

 

The net incomes for Errant and Grub for the year ended December 31, 2019 were $160,000 and $90,000 respectively. Grub paid $9,000 in dividends to Errant during the year. There were no other inter-company transactions during the year. Moreover, an impairment test conducted on December 31, 2019 revealed that the Goodwill should actually have a value of $20,000. Both companies use a FIFO system, and most of Grub's inventory on the date of acquisition was sold during the year. Errant did not declare any dividends during the year.


Assume that any difference between the fair values and book values of the equipment, trademark and bonds payable would all be amortized over 10 years.


Assume that Errant Inc. uses the equity method unless stated otherwise.


Question: What would be Errant's journal entry to record Grub's net income for 2019? 



A. 


Debit

Credit

Investment in Grub

$81,000

 

Equity method income

 

$81,000


B. 


Debit

Credit

Equity method income

$90,000

 

Investment in Grub

 

$90,000


C. 


Debit

Credit

Investment in Grub

$90,000

 

Equity method income

 

$90,000


D. No entry is required.

Top Answer

The journal entry in the books of accounts of Errant to recording the net income of the Grubs is the... View the full answer

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