Equity in Net Income and Eliminating Entries, Intercompany Asset Transfers and Services On January 1, 2018, Pohang Company acquired all of Suro Corporation's voting common stock for $1,500,000. The $1,200,000 excess of acquisition cost over book value of Suro was attributed entirely to goodwill. Suro reported net income of $25,000 and $45,000 in 2018 and 2019, respectively, and paid out 40 percent of each year's earnings in dividends. Pohang reports its investment using the complete equity method. There is no goodwill impairment in 2018 or 2019. Information on intercompany transactions follows: 1. On March 5, 2018, Suro sold land to Pohang for $60,000; the land originally cost $55,000. Pohang continues to hold the land. 2. During 2019, Pohang recorded intercompany merchandise sales of $300,000 to Suro, reflecting a markup of 25 percent on cost. Suro's beginning inventory included $10,000 of merchandise purchased from Pohang. Suro's ending inventory included $15,000 of merchandise purchased from Pohang. 3. On January 1, 2019, Suro sold machinery to Pohang for $25,000 and recorded a gain of $5,000. The machinery is being depreciated over its remaining life of five years, straight-line. 4. Pohang billed Suro $20,000 for services during 2019. Costs incurred in supplying these services amounted to $16,000. On December 31, 2019, the unpaid portion of these intercompany services amounted to $1,000. Required a. Prepare a schedule to compute Pohang's equity in net income of Suro for 2019. Use negative signs with answers that reduce the net income amount. Suro's net income $ 45,000 Intercompany profits in Suro's beginning inventory 2,000 Intercompany profits in Suro's ending inventory Unconfirmed gain on intercompany sale of machinery 3,000 x 4,000 x Equity in net income $ 40,000 b. Prepare the working paper eliminations to consolidate the accounts of Pohang and Suro at December 31, 2019. Ref. Description (C) Equity in net income of Suro Dividends - Suro Investment in Suro Debit 40,000 18,000 22,000 Credit To eliminate the current year equity method entries made by Pohang. (1-1) Retained earnings, beg. - Suro 5,000 Land 5,000 To eliminate the unconfirmed gain from transfer of land. Cost of goods sold (1-2) Sales To eliminate intercompany merchandise sales. (1-3) Investment in Suro 300,000 300,000 2,000 b. Prepare the working paper eliminations to consolidate the accounts of Pohang and Suro at December 31, 2019. Ref. (C) Equity in net income of Suro Description Debit 40,000 Credit Dividends - Suro Investment in Suro 18,000 0 22,000 To eliminate the current year equity method entries made by Pohang. Land (1-1) Retained earnings, beg. - Suro To eliminate the unconfirmed gain from transfer of land. 5,000 5,000 (1-2) Sales Cost of goods sold 300,000 0 300,000 To eliminate intercompany merchandise sales. (1-3) Investment in Suro Cost of goods sold 2,000 0 2,000 To eliminate intercompany profit on downstream sales from beg. inventory. (1-4) Cost of goods sold 3,000 Inventory 0 3,000 To eliminate intercompany profit on upstream sales from end. inventory. (1-5) Gain on sale of machinery 5,000 Machinery, net 5,000 To eliminate the gain on the intercompany sale of machinery. (1-6) Machinery, net Depreciation expense 4,000 x 0 4,000 x To eliminate excess depreciation on the machinery acquired from Suro. (1-7) Service revenue 20,000 Service expense To eliminate intercompany revenue and expense. (1-8) Accounts payable Accounts receivable To eliminate intercompany receivables and payables. (E) Shareholders' equity - Suro Investment in Suro To eliminate the remaining beginning shareholders' equity of Suro. " " 0 20,000 1,000 0 1,000 300,000 x 300,000 x (R) Goodwill Investment in Suro To establish goodwill as of the beg. of the year. 1,200,000 0 1,200,000