Question

EXERCISE 7-7 Entries—Intercompany Sale of Inventory and Equipment LO 7 LO 9 On January 1, 2018, Price Company acquired an 80% interest in the common stock of Smith Company on the open market for $750,000, the book value at that date. On January 1, 2019, Price Company purchased new equipment for $14,500 from Smith Company. The equipment cost $9,000 and had an estimated life of five years as of January 1, 2019. During 2020, Price Company had merchandise sales to Smith Company of $100,000; the merchandise was priced at 25% above Price Company’s cost. Smith Company still owes Price Company $17,500 on open account and has 20% of this merchandise in inventory at December 31, 2020. At the beginning of 2020, Smith Company had in inventory $25,000 of merchandise purchased in the previous period from Price Company. Required: A. Prepare all workpaper entries necessary to eliminate the effects of the intercompany sales on the consolidated financial statements for the year ended December 31, 2020. B. Assume that Smith Company reports net income of $40,000 for the year ended December 31, 2020. Calculate the amount of noncontrolling interest to be deducted from consolidated income in the consolidated income statement for the year ended December 31, 2020.

          EXERCISE 7-7 Entries—Intercompany Sale of Inventory and Equipment LO 7 LO 9
On January 1, 2018, Price Company acquired an 80% interest in the common stock of
Smith Company on the open market for $750,000, the book value at that date.
On January 1, 2019, Price Company purchased new equipment for $14,500 from Smith
Company. The equipment cost $9,000 and had an estimated life of five years as of January 1, 2019.
During 2020, Price Company had merchandise sales to Smith Company of $100,000; the merchandise
was priced at 25% above Price Company’s cost. Smith Company still owes Price Company
$17,500 on open account and has 20% of this merchandise in inventory at December 31, 2020. At
the beginning of 2020, Smith Company had in inventory $25,000 of merchandise purchased in the
previous period from Price Company.
Required:
A. Prepare all workpaper entries necessary to eliminate the effects of the intercompany sales on
the consolidated financial statements for the year ended December 31, 2020.
B. Assume that Smith Company reports net income of $40,000 for the year ended December
31, 2020. Calculate the amount of noncontrolling interest to be deducted from consolidated
income in the consolidated income statement for the year ended December 31, 2020.

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