(50 points) Jones Company acquired an 80% interest in
Smith Company at the beginning of Year 1 for $161,000.
The book value of the stock purchased was $140,000. In
negotiating the purchase price, it was agreed that the
market value was justified in exceeding the book value
because of the strong foothold in the market established
by a newly launched product, Instant Coffee. Competitive
brands are now coming on the market, however, and management
believes that the initial advantage gained by
Smith’s new product will be dissipated in the next five
years. Any goodwill should be amortized over this period.
During Year 1, Jones sold to Smith merchandise for
$85,000 that cost $10,000, and 20% of these goods are still
in Smith’s ending inventory.
Jones uses the cost method to account for its investment
in Smith. Minority interest will reflect the legal method.
a. Complete the accompanying work sheet, supplying
notes to explain the entries.
b. Prepare a statement of consolidated net income showing
A ccount Title
Investment in Smith Company
Dividend Receivable From
Cost of Goods Sold
Consolidating Work Sheet
Year 1 End
Jones Smith Eliminating Entries
Company Company Debits 1 Credits
$100,000 $ 50,000
2. (10 points) Explain a) the nature of minority interest and
b) its proper presentation on a consolidated balance sheet.