Question

Parent acquired Subsidiary on January 1, 2016, at a price $300,000 in excess of book value. Of that excess, $200,000 was allocated to an unrecorded patent with a 10-year life, with the remainder to goodwill. The parent uses the equity method to account for its investment in its subsidiary.

In 2017, Subsidiary sold to Parent land having a book value of $90,000 for a total price of $145,000.

Financial statements of the two companies for the year ended December 31, 2018, are presented below

		Parent	Subsidiary
Sales Revenue		$ 2,500,000	$ 525,000
Cost of Goods Sold		(1,750,000)	(345,000)
Gross Profit		750,000	180,000
Operating Expenses		(475,000)	(102,500)
Income (loss) from Subsidiary		57,500
Net Income		$ 332,500	$ 77,500
Cost of Goods Sold		(1,750,000)	(345,000)
Gross Profit		750,000	180,000
Operating Expenses		(475,000)	(102,500)
Income (loss) from Subsidiary		57,500
Net Income		$ 332,500	$ 77,500
Retained Earnings, 1/1/18		$ 840,700	$ 245,650
Net Income		332,500	77,500
Dividends		(52,900)
Retained Earnings, 12/31/18		$1,120,300	$ 314,300
Cash and Receivables		$ 320,100	$ 178,200
Inventory		461,700	278,600
Equity Investment		625,400
PP&E Net		1,496,500	321,700
Total Assets		$2,903,700	$ 778,500
Accounts Payable		$ 182,400	$ 55,900
Accrued Liabilities		205,300	70,200
Notes Payable		810,000	212,000
Common Stock		354,200	45,000
Additional Paid-in Capital		231,500	81,100
Retained Earnings, 12/31/18		1,120,300	314,300
Total Liabilities and Equities		$2,903,700	$ 778,500
Required: a. Prepare a schedule showing the computation of Income (loss) from subsidiary on the Parent's pre-consolidation books for 2018. b. Prepare a schedule showing the computation of Equity Investment on the Parent's pre-consolidation books at December 31, 2018. c. Prepare the consolidation entries for 2018.

Answer 1

Computation of Income or loss from subsidary on pre consolidation books -

Net income of Subsidary -77500

Parent's share -74%

Income or loss to parent -57500

Computation of Equity Investment

Total Assets 778500

Accounts Payable 55900

Accrued Liabilities 70200

Notes Payable 212000

Equity Investment 440400

Share of Parent -74% 325896

Consolidation Entries

Subsidary a/c dr 325896

Patent in subsidary a/c dr 200000

Goodwill in subsidary a/c dr 100000

To cash A/c 625896

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