Paper Company acquired 100 percent of Scissor Company's outstanding common stock for $370,000 on January 1, 20X8, when the book value of Scissor's net assets was equal to $370,000. Accumulated depreciation on this date was $24,000. Paper uses the equity method to account for investments. The following trial balance summarizes the financial position and operations for Paper and Scissor as of December 31, 20X9: (Assume the company prepares the optional Accumulated Depreciation Elimination Entry.) Paper Company Scissor Company
Debit Credit Debit Credit
Cash $323,000 $116,000
Accounts Receivable 165,000 97,000
Inventory 193,000 115,000
Investment in Scissor Stock 515,000 0
Lad 250,000 125,000
Buildings and equipment 875,000 250,000
Cost of Goods Sold 278,000 178,000
Depreciation Expense 65,000 12,000
Selling & Administrative Expense 312,000 58,000
Dividends Declared 90,000 30,000
Accumulated Depreciation $630,000 $48,000
Accounts Payable 85,000 40,000
Bonds Payable 150,000 100,000
Common Stock 625,000 250,000
Retained Earnings 498,000 188,000
Sales 880,000 355,000
Income from Scissor 107,000 0
Total $2,975,000 $2,975,000 $981,000 $981,000
Required: a. Prepare any equity method journal entry(ies) related to the investment in Scissor Company during 20X9.

b. Prepare a consolidation worksheet for 20X9

Paper (Holding) Company

a)  Journal Entries, related to the investment in Scissor Company:

Date      Description                    Debit            Credit

Dec. 31  Investment in Scissors $107,000

             Income from Scissors                        $107,000

To record 100% share from Scissors' income.

Dec. 31  Cash                            $30,000

             Investment in Scissors                      $30,000

To record 100% share of dividend declared.

b) Consolidation Worksheet:

                                    Paper Company   Scissor Company   Consolidated

                                       Debit     Credit      Debit    Credit       Debit    Credit

                                       $'000    $'000   $'000    $'000      $'000    $'000

Cash                                  323                       116                        439

Accounts Receivable        165                        97                       262

Inventory                           193                        115                       308

Investment in Scissor       515                          0

Land                                 250                       125                       375

Buildings & equipment   875                       250                     1,125

Cost of Goods Sold        278                         178                      456

Depreciation Expense     65                           12                        77

Selling & Administrative 312                          58                      370

Dividends Declared         90                          30                        90

Accumulated Depreciation             630                    48                          678

Accounts Payable                              85                    40                         125

Bonds Payable                                 150                   100                        250

Common Stock                               625                   250                       625

Retained Earnings                          498                    188                       498

Sales                                                880                  355                     1,235

Income from Scissor                       107

Total $2,975,000 $2,975,000    $981,000 $981,000

NB: The Cash balance for  Paper was overstated by $91,000.  This is why the totals cannot add up, even in the question.  But, I have used the figure of $323,000 as provided, hoping that you will make the necessary changes as you discover this observation.

Explanation:

1) Eliminated Entries:

                                      Debit          Credit

Investment in Scissor  515,000

Common Stock                             250,000

Retained Earnings                         188,000

Income from Scissor                     107,000

Dividend Declared       30,000                

Total                           545,000    545,000

2. Consolidation accounting is the process of combining the financial results of several subsidiary companies into the combined financial results of the parent company, used when a parent entity owns more than 50% of the shares of another entity (called a subsidiary).

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