Equity in Net Income and Eliminating Entries, Intercompany Asset Transfers and Services

On January 1, 2018, Pohang Company acquired all of Suro Corporations 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 years 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. Suros beginning inventory included $10,000 of merchandise purchased from Pohang. Suros 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 Pohangs equity in net income of Suro for 2019.

Use negative signs with answers that reduce the net income amount.

Suros net income		Answer
Intercompany profits in Suros beginning inventory		Answer
Intercompany profits in Suros ending inventory		Answer
Unconfirmed gain on intercompany sale of machinery		Answer
Equity in net income		Answer

b. Prepare the working paper eliminations to consolidate the accounts of Pohang and Suro at December 31, 2019.

Ref.	Description		Debit	Credit
(C)	AnswerAccounts payableAccounts receivableCost of goods soldDepreciation expenseDividends - SuroEquity in net income of SuroGain on sale of machineryGoodwillInventoryInvestment in SuroLandMachinery, netRetained earnings, beg. - SuroSalesService expenseService revenueShareholders' equity - Suro		Answer	Answer
	AnswerAccounts payableAccounts receivableCost of goods soldDepreciation expenseDividends - SuroEquity in net income of SuroGain on sale of machineryGoodwillInventoryInvestment in SuroLandMachinery, netRetained earnings, beg. - SuroSalesService expenseService revenueShareholders' equity - Suro		Answer	Answer
	Investment in Suro		Answer	Answer
	To eliminate the current year equity method entries made by Pohang.
(I-1)	AnswerAccounts payableAccounts receivableCost of goods soldDepreciation expenseDividends - SuroEquity in net income of SuroGain on sale of machineryGoodwillInventoryInvestment in SuroLandMachinery, netRetained earnings, beg. - SuroSalesService expenseService revenueShareholders' equity - Suro		Answer	Answer
	AnswerAccounts payableAccounts receivableCost of goods soldDepreciation expenseDividends - SuroEquity in net income of SuroGain on sale of machineryGoodwillInventoryInvestment in SuroLandMachinery, netRetained earnings, beg. - SuroSalesService expenseService revenueShareholders' equity - Suro		Answer	Answer
	To eliminate the unconfirmed gain from transfer of land.
(I-2)	AnswerAccounts payableAccounts receivableCost of goods soldDepreciation expenseDividends - SuroEquity in net income of SuroGain on sale of machineryGoodwillInventoryInvestment in SuroLandMachinery, netRetained earnings, beg. - SuroSalesService expenseService revenueShareholders' equity - Suro		Answer	Answer
	AnswerAccounts payableAccounts receivableCost of goods soldDepreciation expenseDividends - SuroEquity in net income of SuroGain on sale of machineryGoodwillInventoryInvestment in SuroLandMachinery, netRetained earnings, beg. - SuroSalesService expenseService revenueShareholders' equity - Suro		Answer	Answer
	To eliminate intercompany merchandise sales.
(I-3)	AnswerAccounts payableAccounts receivableCost of goods soldDepreciation expenseDividends - SuroEquity in net income of SuroGain on sale of machineryGoodwillInventoryInvestment in SuroLandMachinery, netRetained earnings, beg. - SuroSalesService expenseService revenueShareholders' equity - Suro		Answer	Answer
	AnswerAccounts payableAccounts receivableCost of goods soldDepreciation expenseDividends - SuroEquity in net income of SuroGain on sale of machineryGoodwillInventoryInvestment in SuroLandMachinery, netRetained earnings, beg. - SuroSalesService expenseService revenueShareholders' equity - Suro		Answer	Answer
	To eliminate intercompany profit on downstream sales from beg. inventory.
(I-4)	AnswerAccounts payableAccounts receivableCost of goods soldDepreciation expenseDividends - SuroEquity in net income of SuroGain on sale of machineryGoodwillInventoryInvestment in SuroLandMachinery, netRetained earnings, beg. - SuroSalesService expenseService revenueShareholders' equity - Suro		Answer	Answer
	AnswerAccounts payableAccounts receivableCost of goods soldDepreciation expenseDividends - SuroEquity in net income of SuroGain on sale of machineryGoodwillInventoryInvestment in SuroLandMachinery, netRetained earnings, beg. - SuroSalesService expenseService revenueShareholders' equity - Suro		Answer	Answer
	To eliminate intercompany profit on upstream sales from end. inventory.
(I-5)	AnswerAccounts payableAccounts receivableCost of goods soldDepreciation expenseDividends - SuroEquity in net income of SuroGain on sale of machineryGoodwillInventoryInvestment in SuroLandMachinery, netRetained earnings, beg. - SuroSalesService expenseService revenueShareholders' equity - Suro		Answer	Answer
	AnswerAccounts payableAccounts receivableCost of goods soldDepreciation expenseDividends - SuroEquity in net income of SuroGain on sale of machineryGoodwillInventoryInvestment in SuroLandMachinery, netRetained earnings, beg. - SuroSalesService expenseService revenueShareholders' equity - Suro		Answer	Answer
	To eliminate the gain on the intercompany sale of machinery.
(I-6)	AnswerAccounts payableAccounts receivableCost of goods soldDepreciation expenseDividends - SuroEquity in net income of SuroGain on sale of machineryGoodwillInventoryInvestment in SuroLandMachinery, netRetained earnings, beg. - SuroSalesService expenseService revenueShareholders' equity - Suro		Answer	Answer
	AnswerAccounts payableAccounts receivableCost of goods soldDepreciation expenseDividends - SuroEquity in net income of SuroGain on sale of machineryGoodwillInventoryInvestment in SuroLandMachinery, netRetained earnings, beg. - SuroSalesService expenseService revenueShareholders' equity - Suro		Answer	Answer
	To eliminate excess depreciation on the machinery acquired from Suro.
(I-7)	AnswerAccounts payableAccounts receivableCost of goods soldDepreciation expenseDividends - SuroEquity in net income of SuroGain on sale of machineryGoodwillInventoryInvestment in SuroLandMachinery, netRetained earnings, beg. - SuroSalesService expenseService revenueShareholders' equity - Suro		Answer	Answer
	AnswerAccounts payableAccounts receivableCost of goods soldDepreciation expenseDividends - SuroEquity in net income of SuroGain on sale of machineryGoodwillInventoryInvestment in SuroLandMachinery, netRetained earnings, beg. - SuroSalesService expenseService revenueShareholders' equity - Suro		Answer	Answer
	To eliminate intercompany revenue and expense.
(I-8)	AnswerAccounts payableAccounts receivableCost of goods soldDepreciation expenseDividends - SuroEquity in net income of SuroGain on sale of machineryGoodwillInventoryInvestment in SuroLandMachinery, netRetained earnings, beg. - SuroSalesService expenseService revenueShareholders' equity - Suro		Answer	Answer
	AnswerAccounts payableAccounts receivableCost of goods soldDepreciation expenseDividends - SuroEquity in net income of SuroGain on sale of machineryGoodwillInventoryInvestment in SuroLandMachinery, netRetained earnings, beg. - SuroSalesService expenseService revenueShareholders' equity - Suro Correct Mark 1.00 out of 1.00		Answer	Answer
	To eliminate intercompany receivables and payables.
(E)	AnswerAccounts payableAccounts receivableCost of goods soldDepreciation expenseDividends - SuroEquity in net income of SuroGain on sale of machineryGoodwillInventoryInvestment in SuroLandMachinery, netRetained earnings, beg. - SuroSalesService expenseService revenueShareholders' equity - Suro		Answer	Answer
	AnswerAccounts payableAccounts receivableCost of goods soldDepreciation expenseDividends - SuroEquity in net income of SuroGain on sale of machineryGoodwillInventoryInvestment in SuroLandMachinery, netRetained earnings, beg. - SuroSalesService expenseService revenueShareholders' equity - Suro		Answer	Answer
	To eliminate the remaining beginning shareholders equity of Suro.
(R)	AnswerAccounts payableAccounts receivableCost of goods soldDepreciation expenseDividends - SuroEquity in net income of SuroGain on sale of machineryGoodwillInventoryInvestment in SuroLandMachinery, netRetained earnings, beg. - SuroSalesService expenseService revenueShareholders' equity - Suro		Answer	Answer
	AnswerAccounts payableAccounts receivableCost of goods soldDepreciation expenseDividends - SuroEquity in net income of SuroGain on sale of machineryGoodwillInventoryInvestment in SuroLandMachinery, netRetained earnings, beg. - SuroSalesService expenseService revenueShareholders' equity - Suro		Answer	Answer
	To establish goodwill as of the beg. of the year.