Jones Co. acquired an 80% interest in Smith Co. 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.
Required:
a. Complete the accompanying work sheet, supplying notes to explain the entries.
b. Prepare a statement of consolidated net income showing minority interest.
c. Explain the nature of minority interest and its proper presentation on the balance sheet.
Account Title Jones Co. Smith Co. Eliminating Entries Consolidated Trial Balance
Credits Debits
Inventory 100,000 50,000
Investment in Smith Company 161,000 0
Dividend Receivable from Smith
Company 2,400 0
Other Assets 242,600 150,000
Cost of Goods Sold 313,400 121,600
Operating Expenses 135,200 30,200
Income Taxes 18,400 7,200
Dividends Paid-Jones Company 15,000 0
Dividends Paid-Smith Company 0 6,000
Liabilities 96,500 41,000
Dividends Payable 7,500 3,000
Sales -495,200 -181,000
Dividend Income -4,800 0
Capital Stock-Jones Company -300,000 0
Capital Stock-Smith Company 0 -100,000
Retained Earnings-Jones Co. -84,000 0
Retained Earnings-Smith Co. 0 -40,000