Question

Determining ending consolidated balances in the second year following the acquisition—Equity method

Assume a parent company acquired a subsidiary on January 1, 2018. The purchase price was $760,000 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 (years)
Property, plant and equipment (PPE), net	$360,000	12
Goodwill	400,000	Indefinite
	$760,000

The AAP asset relating to undervalued PPE with a 12-year useful life has been depreciated as part of the parent’s equity method accounting. The financial statements of the parent and its subsidiary for the year ended December 31, 2019, are as follows:

	Parent	Subsidiary			Parent	Subsidiary
Income statement:				Balance sheet:
Sales	$6,000,000	$1,500,000		Assets
Cost of goods sold	(3,500,000)	(900,000)		Cash	$727,000	$386,000
Gross profit	2,500,000	600,000		Accounts receivable	1,000,000	348,000
Equity income	170,000			Inventory	1,600,000	442,000
Operating expenses	(1,000,000)	(400,000)		Equity investment	1,873,000
Net income	$1,670,000	$200,000		Property, plant and equipment (PPE), net	4,800,000	824,000
					$10,000,000	$2,000,000
Statement of retained earnings:
BOY retained earnings	$1,000,000	$780,000		Liabilities and stockholders’ equity
Net income	1,670,000	200,000		Accounts payable	$900,000	$140,000
Dividends	(210,000)	(32,000)		Accrued liabilities	1,200,000	187,000
Ending retained earnings	$2,460,000	$948,000		Long-term liabilities	2,800,000	500,000
				Common stock	640,000	100,000
				APIC	2,000,000	125,000
				Retained earnings	2,460,000	948,000
					$10,000,000	$2,000,000

At what amount will the following accounts appear on the consolidated financial statements?

a.	Sales	Answer
b.	Equity income	Answer
c.	Operating expenses	Answer
d.	Accounts receivable	Answer
e.	Equity investment	Answer
f.	Property plant and equipment (PPE) net	Answer
g.	Goodwill	Answer
h.	Common stock	Answer
i.	Retained earnings	Answer

Answer 1

The amount at which the following appear in consolidated financial statements

Particulars	Parent	Subsidiary	Elimination	Total $
Sales	6,000,000	1,500,000	0	7,500,000
Equity Income	170,000	0	0	170,000
Operating expenses	1,000,000	400,000	0	1,400,000
Accounts receivable	1,000,000	348,000	0	1,348,000
Equity investment	1,873,000	0	1,873,000)	0
PPE	4,800,000	824,000+360,000=1184000	0	5,984,000
Goodwill	400,000	0	0	4,00,000
Common stock	640,000	0	0	640,000
Retained earnings	2,460,000	0	0	2,460,000