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Question(s) / Instruction(s):

38.     The working paper elimination (in journal entry format) for Parson Corporation and subsidiary on February 28, 2005, (the date of the business combination) was as follows:

 

Common Stock?Sexton

100,000

 

 

Retained Earnings?Sexton

400,000

 

 

Inventories (first-in, first-out)?Sexton

50,000

 

 

Plant Assets (net, 10-year economic life)?Sexton

90,000

 

 

Goodwill?Sexton

40,000

 

 

 

Investment in Sexton Company Common Stock?Parson

680,000

To eliminate intercompany investment and equity accounts of
          subsidiary on date of business combination; and to allocate excess
          of cost over carrying amount of identifiable assets acquired, with
          remainder to goodwill. (Income tax effects are disregarded.)
          
          For the fiscal year ended February 28, 2006, Sexton had a net income of $120,000 and declared a dividend of $40,000 to Parson. Sexton includes straight-line depreciation in operating expenses. Goodwill was unimpaired on February 28, 2006.

          Prepare a working paper elimination (in journal entry format) for Parson Corporation and subsidiary on February 28, 2006. Omit explanation and disregard income taxes.

Case

     39.     In a classroom discussion of the relative merits of the equity method and the cost method of accounting for operations of subsidiaries, most students of Professor Long's advanced accounting class expressed a preference for the equity method, influenced in large part by their textbook's support for that method. Student Rita, however, suggested that, for a parent company with several subsidiaries, the cost method of accounting might be more cost-effective because it entails fewer journal entries than does the equity method. In Rita's view, it would be more efficient in such circumstances to make the multitudinous entries for subsidiaries' operations in the working paper for consolidated financial statements than in several ledger accounts in computerized accounting records.

          Do you agree with student Rita's view? Explain.

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