On January 1, 20X8, Ramon Corporation acquired 75 percent of Tester Company's voting common stock for $300,000. At the time of the combination, Tester reported common stock outstanding of $200,000 and retained earnings of $150,000, and the fair value of the noncontrolling interest was $100,000. The book value of Tester's net assets approximated market value except for patents that had a market value of $50,000 more than their book value. The patents had a remaining economic life of ten years at the date of the business combination. Tester reported net income of $40,000 and paid dividends of $10,000 during 20X8.
-Based on the preceding information, which of the following is an eliminating entry needed to prepare a full set of consolidated financial statements at December 31, 20X8?
A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question

On January 1, 20X8, Ramon Corporation acquired 75 percent of Tester Company's voting common stock for $300,000. At the time of the combination, Tester reported common stock outstanding of $200,000 and retained earnings of $150,000, and the fair value of the noncontrolling interest was $100,000. The book value of Tester's net assets approximated market value except for patents that had a market value of $50,000 more than their book value. The patents had a remaining economic life of ten years at the date of the business combination. Tester reported net income of $40,000 and paid dividends of $10,000 during 20X8.
-Based on the preceding information, which of the following is an eliminating entry needed to prepare a full set of consolidated financial statements at December 31, 20X8? 
A) Choice A 
B) Choice B 
C) Choice C 
D) Choice D

Quizplus · Accepted Answer

An eliminating entry is necessary to remove the effects of the intercompany sale of patents on consolidated financial statements. Since Ramon now owns 75% of Tester, it effectively owns 75% of the difference between the book value and fair value of the patents, which is $37,500 (75% x $50,000). Therefore, an entry must be made to eliminate the increase in the carrying value of patents due to the intercompany sale. Choice C correctly reflects this by reducing the carrying amount of patents by $37,500 (75% x $50,000) and reducing retained earnings by $12,500 (75% of the $10,000 dividend paid by Tester, plus 75% of Tester's net income of $40,000 less the $37,500 reduction to the carrying amount of patents).

On January 1, 20X8, Ramon Corporation Acquired 75 Percent of Tester