Question

Consolidation several years subsequent to date of acquisition—Equity method Assume that a parent company acquired a...

Consolidation several years subsequent to date of acquisition—Equity method
Assume that a parent company acquired a subsidiary on January 1, 2014. The purchase price was $665,000 in excess of the subsidiary’s book value of Stockholders’ Equity on the acquisition date, and that excess was assigned to the following [A] assets:

[A] Asset Original
Amount
Original
Useful
Life
Property, plant and equipment (PPE), net $140,000 16 years
Patent 245,000 7 years
License 105,000 10 years
Goodwill 175,000 Indefinite
$665,000


The [A] assets with definite useful lives have been depreciated or amortized as part of the parent’s preconsolidation equity method accounting. The Goodwill asset has been tested annually for impairment, and has not been found to be impaired. The financial statements of the parent and its subsidiary for the year ended December 31, 2016, are as follows:

Parent Subsidiary Parent Subsidiary
Income statement Balance sheet
Sales $4,802,000 $1,308,300 Assets
Cost of goods sold (3,457,300) (784,700) Cash $719,600 $337,400
Gross profit 1,344,700 523,600 Accounts receivable 1,229,200 303,800
Equity income 129,150 - Inventory 1,624,000 389,900
Operating expenses (720,300) (340,200) Equity investment 1,530,550 -
Net income $753,550 $183,400 Property, plant & equipment 2,923,200 721,000
Statement of retained earnings $8,026,550 $1,752,100
BOY retained earnings 1,694,700 676,200 Liabilities and stockholders' equity
Net income 753,550 183,400 Accounts payable $702,800 $124,600
Dividends (364,000) (28,000) Accrued liabilities 835,800 163,100
Ending retained earnings $2,084,250 $831,600 Long-term liabilities 2,100,000 436,100
Common stock 527,100 87,500
APIC 1,776,600 109,200
Retained earnings 2,084,250 831,600
$8,026,550 $1,752,100


a. Compute the Equity Investment balance as of January 1, 2016.

$Answer

b. Show the computation to yield the $129,150 equity income reported by the parent for the year ended December 31, 2016.

Do not use negative signs with your answers.

Subsidiary net income $Answer
Less: Amortization Answer
Less: Depreciation Answer Answer
$Answer


c. Show the computation to yield the $1,530,550 Equity Investment account balance reported by the parent at December 31, 2016.

Do not use negative signs with your answers.

Equity investment at 1/1/16 $Answer
Plus: Answer
Answer
Less: Answer
Answer Answer
Equity investment at 12/31/16 $Answer


d. Prepare the consolidation entries for the year ended December 31, 2016.

Consolidation Journal
Description Debit Credit
[C] Answer
Answer Answer
Answer
Answer Answer
Equity investment Answer Answer
[E] Common Stock Answer Answer
APIC Answer Answer
Answer
Answer Answer
Answer
Answer Answer
[A] PPE, net Answer Answer
Patent Answer Answer
Licenses Answer Answer
Answer
Answer Answer
Answer
Answer Answer
[D] Answer
Answer Answer
Answer
Answer Answer
Patent Answer Answer
Licenses Answer Answer

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