Jones Company acquired an 80% interest in Smith Company at the beginning of Year 1 for $161,000. The book value of the stock purchased was $140,000. In negotiating the purchase price, it was agreed that the market value was justified in exceeding the book value because of the strong foothold in the market established by a newly launched product, Instant Coffee. Competitive brands are now coming on the market, however, and management
believes that the initial advantage gained by Smith's new product will be dissipated in the next five years. Any goodwill should be amortized over this period. During Year 1, Jones sold to Smith merchandise for $85,000 that cost $10,000, and 20% of these goods are still in Smith's ending inventory. Jones uses the cost method to account for its investment in Smith. Minority interest will reflect the legal method.
a. Complete the accompanying work sheet, supplying
notes to explain the entries.
b. Prepare a statement of consolidated net income showing
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