Question
Pop Company acquires 85% of Sonny Company for $637,500 on January, 1 2014. Sonny reported common stock of $300,000 and retained earnings of $210,000 on
Pop Company acquires 85% of Sonny Company for $637,500 on January, 1 2014. Sonny reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $50,000, equipment having a 6-year remaining life and the building having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Pop accounts for its investment in Sonny using the equity method. Based on an annual review, goodwill has not been impaired. Sonny earns income and pays dividends as follows:
2014 2015 2016 2017
Net Income: $100,000 $120,000 $130,000 $150,000
Dividends: $40,000 $50,000 $60,000 $70,000
A) Prepare all of Pop's 2017 journal entries to apply the equity method to this investment.
B) What consolidation (elimination) entries are needed as of December 31, 2017.
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