Question

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

Answer 1