Question
A parent company acquired 80% of the stock of a subsidiary company on January 1, 2015, for $192,600. On this date, the balances of the
A parent company acquired 80% of the stock of a subsidiary company on January 1, 2015, for
$192,600.
On this date, the balances of the subsidiarys stockholders equity accounts were Common Stock,
$120,000, and Retained Earnings, $24,000. On January 1, 2015, the market value for the 20% of shares not
purchased by the parent was $47,400.
On January 1, 2015, the subsidiarys recorded book values were equal to fair values for all items
except four: (1) accounts receivable had a book value of $30,000 and a fair value of $26,000, (2) buildings and
equipment, net had a book value of $50,000 and a fair value of $68,000, (3) the licenses intangible asset had a book
value of $35,000 and a fair value of $77,000, and (4) notes payable had a book value of $20,000 and a fair value of
$14,000. Both companies use the FIFO inventory method and sell all of their inventories at least once per year. The
net balance of accounts receivables are collected in the following year. On the acquisition date, the subsidiarys
buildings and equipment, net had a remaining useful life of 6 years, licenses had a remaining useful life of 7 years,
and notes payable had a remaining term of 4 years.
On January 1, 2018, the parent sold a building to the subsidiary for $80,000. On this date, the
building was carried on the parents books (net of accumulated depreciation) at $65,000. Both companies estimated
that the building has a remaining life of 6 years on the intercompany sale date, with no salvage value.
Each company routinely sells merchandise to the other company, with a profit margin of 25 per-
cent of selling price (regardless of the direction of the sale). During 2019, intercompany sales amount to $15,000, of
which $8,000 of merchandise remains in the ending inventory of the parent. On December 31, 2019, $4,000 of these
intercompany sales remained unpaid. Additionally, the subsidiarys December 31, 2018 inventory includes $12,000
of merchandise purchased in the preceding year from the parent. During 2018, intercompany sales amount to
$20,000, and on December 31, 2018, $6,000 of these intercompany sales remained unpaid.
b. Calculate and organize the profits and losses on intercompany transactions and balances.
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