Pink Company acquired 100 percent of Scarlet Company's outstanding common stock for $42,000 on January 1, 2020, equals to the book value of Scarlet's net assets. In exchange for Scarlet's stock Pink issued bonds payable with par value of $40,000 and fair value of $42,000 directly to the stockholders of Scarlet. Pink uses the equity method to account for investments. Adjusted trial balance data for Pink and Scarlet as of December 31, 2020, are as follows (all amounts are in dollars): Pink Company Scarlet Company CR DR CR DR $12,200 Cash $4,200 Accounts Receivable 22,000 13,500 Inventory 17,500 14,000 Investment in Scarlet 48,800 Land 25,000 11,500 Buildings and equipment 87,500 25,000 Cost of Goods Sold 25,000 15,200 6,500 1,500 Depreciation Expense Selling and Administrative Expense 28,000 5,000 Dividends Declared 7,000 2,500 Accumulated Depreciation $56,000 $4,500 Accounts Payable 8,700 6,400 Bonds Payable 35,000 8,500 Common Stock 62,500 30,000 28,000 12,000 Retained Earnings Sales 80,000 31,000 Income from Scarlet 9,300 $279,500 $279,500 $92,400 $92,400 Total a) Prepare the Equity method journal entries related to the investment in Scarlet during 2020 (15 points). b) Prepare Book Value calculation table (5 points) c) Prepare basic consolidation entry (20 points). d] Prepare accumulated depreciation consolidation entry (10 points). e) Prepare a consolidation worksheet for 2020 in good form (40 points). f) Prepare a consolidated balance sheet as of December 31 2020 (10 Points) SOLUTION Equity method journal entries related to the investment ACCOUNT TITLE Book Value Calculations Book Value Calculation Total Book Value Basic Consolidation entry ACCOUNT TITLE Accumulated depreciation consolidation Entry ACCOUNT TITLE Debit Common Stock Debit Debit Credit Retained Earnings Credit Credit Consolidation worksheet Income Statement Sales Less: COGS Less: Depreciation Expense Less: Other Expenses Income from Scarlet Company Net Income Beginning Balance Net Income Less: Dividends Declared Ending Balance Balance Sheet Assets: Cash Accounts Receivable Inventory Investment in Scarlet Company Land Buildings & Equipment Less: Accumulated Depreciation Total Assets Liabilities and Equity: Accounts Payable Bonds Payable Common Stock Retained Earnings Total Liabilities & Equity Pink Scarlet Elimination Entries CR DR Consolidated