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Accounts X Company Y Company Sales Dividend income Cost of goods sold Other expenses (400,000) (15,000) 320,000 40,000 (150,000) (2,000) 80,000

Congratulations! You are now the new accountant of the X Company. X acquired 90% of Y's stock on January 1, 2011. X manufactures devices used at firework displays and Y conducts these displays. X decided to make this acquisition because Y was seen as a natural extension of X's business.

Unfortunately, some of the accounting records were recently destroyed in a flood (not a fire). Hap Hazard, the former accountant, was fired because he lacked the necessary accounting skills demanded by this position.

You were able to ascertain that Hap used the cost method to account for this investment and the related transaction that occurred during 2011 appeared to be properly recorded. However, upon further review the entry to record the initial investment looks suspicious and may need to be adjusted.

From your review, you determine the following:
1. X issued to the public 100,000 shares of $1 par stock. X received $1,000,000 in this transaction.

2. The entire proceeds were then used to purchase a 90% interest in Y.

3. Hap recorded the above transactions with a debit entry to the Investment in Y for $720,000 and
credits to Common Stock for $100,000, Paid-in-Capital in Excess of Par for $350,000 and Retained
Earnings for $270,000.

4. The fair market value of Y's equipment was $100,000 higher than its net book value. This
equipment has a five-year remaining life. All other assets and liabilities were stated at their fair
value on January 1, 2011.

Additional information
X sold merchandise costing $40,000 to Y for $55,000 during 2011. At December 31, Y had 20% of this merchandise on hand.

Y declared $20,000 in dividends during 2011. At December 31, only $15,000 of this dividend had actually been paid.

Your boss, Jane Orderly, told you to make the necessary entries on the worksheet to straighten out the mess. She said "We might have to make entries on our books or Y's to fix this mess. If so, we will do that next year. Right now, I want you to get the consolidation worksheet completed ASAP!"

Accounting policies
Intangibles are amortized over a ten year period. Assume no impairment in Goodwill. X recognizes dividend income when the cash is received. X uses the straight-line depreciation method.

Complete a consolidating worksheet for 2011 (using a spreadsheet program). Ignore income taxes. The attached worksheet is given to provide the account balances and to serve as a scratch sheet prior to generating the consolidated balances that are to be submitted.
Accounts X Company Y Company Eliminations Debit Credit Consolidated Balances Sales Dividend income Cost of goods sold Other expenses (400,000) (15,000) 320,000 40,000 (150,000) (2,000) 80,000 31,000 Net Income (55,000) (41,000) 1/1 Retained earnings Net income from above Dividends (950,000) (55,000) 40,000 (300,000) (41,000) 20,000 12/31 Retained Earnings (965,000) (321,000) Cash Notes Receivable Accounts Receivable Inventory Investment in Pyrotech Land & Building (net) Equipment (net) Goodwill 100,000 30,000 101,000 60,000 720,000 200,000 554,000 30,000 71,000 20,000 95,000 50,000 245,000 400,000 Total assets 1,795,000 881,000 Accounts Payable Notes Payable Dividends Payable Common stock Paid-in excess Retained earnings (80,000) (250,000) (500,000) (965,000) (25,000) (30,000) (5,000) (50,000) (450,000) (321,000) Total L & SE (1,795,000) (881,000)
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