X Co. acquired 80% of Y Co. on January 1, Year 3, when Y Co. had common shares of $210,000 and
retained earnings of $81,000. The acquisition differential was allocated as follows on this date:
Inventory $ 71,000
Equipment (15-year life) 61,500
Total acquisition differential $132,500
Since this date the following events have occurred:
Year 3
• Y Co. reported a net income of $151,000 and paid dividends of $36,000.
• On July 3, X Co. sold land to Y Co. for $134,000. This land was carried in the records of X Co. at
$86,000.
• On December 31, Year 3, the inventory of X Co. contained an intercompany profit of $41,000.
• X Co. reported a net income of $510,000 from its own operations.
Year 4
• Y Co. reported a net loss of $27,000 and paid dividends of $4,000.
• Y Co. sold the land that it purchased from X Co. to an unrelated company for $151,000.
• On December 31, Year 4, the inventory of Y Co. contained an intercompany profit of $23,000.
• X Co. reported a net income from its own operations of $83,000.
Required:
Assume a 40% tax rate.
(a) Prepare X Co.’s equity method journal entries subsequent to the date of acquisition for each of Years 3
and 4. (Input all values as positive numbers.)