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On January 1, 2020, James Company purchased 100 percent of the outstanding voting stock of Nolan, Inc., for $1,000,000 in cash and other consideration. At the purchase date, Nolan had common stock of $500,000 and retained earnings of $185,000. James attributed the excess of acquisition-date fair value over Nolan’s book value to a trade name with an estimated 25-year remaining useful life. James uses the equity method to account for its investment in Nolan.
During the next two years, Nolan reported the following:
Nolan sells inventory to James after a markup based on a gross profit rate. At the end of 2020 and 2021, 30 percent of the current year purchases remain in James’s inventory.
Using the attached Excel template, compute the following:
- The Equity Method balance in James’ Investment in Nolan, Inc., account as of December 31, 2021
- Worksheet adjustments for the December 31, 2021 adjustments of James and Nolan. Use the following Codes to designate the purpose of the journal entry:
Formulate your solution so that Nolan’s gross profit rate on sales to James is treated as a variable.
