Equity Method and Eliminating Entries Three Years After Acquisition

Puffin Industries acquired all of Sunset Coast Digital's stock on January 1, 2014, for $8,750,000, $5,250,000 in excess of book value. At that time, Sunset Coast's inventory (LIFO) was overvalued by $1,250,000 and its plant assets (10-year life) were overvalued by $2,500,000. The remaining excess of cost over book value is attributed to undervalued identifiable intangible assets being amortized over 20 years. Sunset Coast depreciates plant assets and amortizes intangibles by the straight-line method. During the next three years Sunset Coast reported total net income of $2,125,000 and paid out 50 percent in dividends. Puffin carries its investment in Sunset Coast using the complete equity method. Sunset Coast's inventory increased each year since it was acquired by Puffin, and Sunset Coast's reported net income for 2016 was $500,000.

For parts a. and b., use negative signs with any answers that reduce equity in net income or the investment account.

a. Compute Puffin's 2016 equity in net income of Sunset Coast.

Sunset Coast's reported net income for 2016	Answer
Revaluation write-offs:
AnswerInventoryCapital stockPlant assetsGoodwill	Answer
AnswerInventoryIdentifiable intangiblesGoodwillCapital stock	Answer
Equity in net income of Sunset Coast	Answer

b. Compute the balance in the Investment in Sunset Coast account at December 31, 2016, after all equity method entries have been booked.

Investment in Sunset Coast, January 1, 2014	Answer
Sunset Coast's reported income, 2014-2016	Answer
Sunset Coast's reported dividends, 2014-2016	Answer
Revaluation write-offs, 2014-2016:
AnswerInventoryCapital stockPlant assetsGoodwill	Answer
AnswerInventoryIdentifiable intangiblesGoodwillCapital stock	Answer
Investment in Sunset Coast, December 31, 2016	Answer

c. Prepare the working paper eliminating entries needed in consolidation at December 31, 2016.

Consolidation Journal
Ref.	Description	Debit	Credit
(C)	AnswerEquity in net income of Sunset CoastDividends - Sunset CoastStockholders' equity-Sunset Coast, 1/1Investment in Sunset CoastIdentifiable intangiblesPlant assets, netGoodwillInventory	Answer	Answer
	AnswerEquity in net income of Sunset CoastDividends - Sunset CoastStockholders' equity-Sunset Coast, 1/1Investment in Sunset CoastPlant assets, netIdentifiable intangiblesGoodwillInventory	Answer	Answer
	Investment in Sunset Coast	Answer	Answer
(E)	AnswerEquity in net income of Sunset CoastDividends - Sunset CoastStockholders' equity-Sunset Coast, 1/1Investment in Sunset CoastPlant assets, netIdentifiable intangiblesGoodwillInventory	Answer	Answer
	AnswerEquity in net income of Sunset CoastDividends -Sunset CoastStockholders' equity-Sunset Coast, 1/1Investment in Sunset CoastPlant assets, netIdentifiable intangiblesGoodwillInventory	Answer	Answer
(R)	AnswerEquity in net income of Sunset CoastDividends - Sunset CoastStockholders' equity-Sunset Coast, 1/1Investment in Sunset CoastIdentifiable intangiblesPlant assets, netGoodwillInventory	Answer	Answer
	Inventory	Answer	Answer
	Plant assets, net	Answer	Answer
	AnswerEquity in net income of Sunset CoastDividends - Sunset CoastStockholders' equity-Sunset Coast, 1/1Investment in Sunset CoastIdentifiable intangiblesPlant assets, netGoodwillInventory	Answer	Answer
(O)	AnswerEquity in net income of Sunset CoastDividends - Sunset CoastStockholders' equity-Sunset Coast, 1/1Investment in Sunset CoastPlant assets, netIdentifiable intangiblesGoodwillInventory	Answer	Answer
	Amortization expense	Answer	Answer
	Depreciation expense	Answer	Answer
	AnswerEquity in net income of Sunset CoastDividends - Sunset CoastStockholders' equity-Sunset Coast, 1/1Investment in Sunset CoastPlant assets, netIdentifiable intangiblesGoodwillInventory	Answer	Answer

d. If Puffin reports $1,500,000 net income from its own operations in 2016, what is consolidated net income for 2016?

Answer