Large Ltd. purchased 75% of Small Company on January 1, Year 1, for $600,000, when the statement of financial position for Small showed common shares of $400,000 and retained earnings of $100,000. On that date, the inventory of Small was undervalued by $40,000, and a patent with an estimated remaining life of 5 years was overvalued by $70,000. Small reported the following subsequent to January 1, Year 1: A test for goodwill impairment on December 31, Year 3, indicated a loss of $19,300 being recorded for Year 3 on the consolidated income statement. Large uses the cost method to account for its investment in Small and reported the following for Year 3 for its separate-entity statement of changes in equity: Retained earnings, beginning …..$500,000 Profit………….. 200,000 Dividends …………. (70,000) Retained earnings, end ……..$630,000 Required: (a) Prepare the cost method journal entries of Large for each year. (b) Compute the following on the consolidated financial statements for the year ended December 31, Year 3: (i) Goodwill (ii) Non-controlling interest on the statement of financial position (iii) Retained earnings, beginning of year (iv) Profit attributable to Large’s shareholders (v) Profit attributable to non-controlling interest (c) Now assume that Large is a private entity, uses ASPE, and chooses to use the equity method to report its investment in Small. (i) Prepare Large’s journal entries for each year related to its investment in Small. (ii) Determine the investment in Small at December 31, Year 3. View Solution:
Large Ltd purchased 75 of Small Company on January 1