(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…

(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.

Required:

a. Complete the accompanying work sheet, supplying

notes to explain the entries.

b. Prepare a statement of consolidated net income showing

minority interest.

A ccount Title

Inventory

Investment in Smith Company

Dividend Receivable From

Smith Company

Other Assets

Cost of Goods Sold

Operating Expenses

Income Taxes

Dividends Paid-

Jones Company

Dividends Paid-

Smith Company

Liabilities

Dividends Payable

Sales

Dividend Income

Capital Stock-

Jones Company

Capital Stock-

Smith Company

Retained Earnings-

Jones Company

Retained Earnings-

Smith Company

Total

JONES COMPANY

Consolidating Work Sheet

Year 1 End

Jones Smith Eliminating Entries

Company Company Debits 1 Credits

$100,000 $ 50,000

161,000

2,400

242,600 150,000

313,400 121,600

135,200 30,200

18,400 7,200

15,000

6,000

96,500 41,000

7,500 3,000

(495,200) (181,000)

(4,800)

(300,000)

(100,000)

(84,000)

{40,000}

0 0

2. (10 points) Explain a) the nature of minority interest and

b) its proper presentation on a consolidated balance sheet.

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