Assume a parent company acquired a subsidiary on January 1, 2018. The purchase price was $880,000 in excess of the subsidiarys 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	$272,000	17 years
Patent	288,000	12 years
Goodwill	320,000	Indefinite
	$880,000

The parent company uses the cost method of pre-consolidation Equity Investment bookkeeping. The Goodwill asset has been tested annually for impairment and has not been found to be impaired. Selected accounts from the parent, subsidiary, and consolidated financial statements for the year ended December 31, 2022, are as follows:

	Parent	Subsidiary	Consolidated
Income statement
Sales	$6,000,000	$1,320,000	7,320,000
Cost of goods sold	(3,600,000)	(712,000)	(4,312,000)
Gross profit	2,400,000	608,000	3,008,000
Investment income	80,000	-	-
Operating expenses	(1,120,000)	(400,000)	(1,560,000)
Net income	$1,360,000	$208,000	$1,448,000
Statement of retained earnings
BOY retained earnings	1,600,000	672,000	1,792,000
Net income	1,360,000	208,000	1,448,000
Dividends	(160,000)	(80,000)	(160,000)
Ending retained earnings	$2,800,000	$800,000	$3,080,000
Balance sheet
Assets
Cash	640,000	336,000	976,000
Accounts receivable	960,000	304,000	1,264,000
Inventory	1,520,000	392,000	1,912,000
Equity investment	1,408,000	-	-
Property, plant & equipment, net	4,800,000	728,000	5,720,000
Patent			168,000
Goodwill	-	-	320,000
	$9,328,000	$1,760,000	$10,360,000
Liabilities and stockholders' equity	-	-
Accounts payable	720,000	120,000	840,000
Accrued liabilities	1,072,000	192,000	1,264,000
Long-term liabilities	3,200,000	440,000	3,640,000
Common stock	576,000	88,000	576,000
APIC	960,000	120,000	960,000
Retained earnings	2,800,000	800,000	3,080,000
	$9,328,000	$1,760,000	$10,360,000

a. For the year ended December 31, 2022, explain how the parents pre-consolidation investment income of $80,000 was determined.

Under the cost method, investment income equals the dividends received from the subsidiary.

Under the cost method, investment income equals equity income minus dividends received from the subsidiary.

Under the cost method, investment income equals equity income plus dividends received from the subsidiary.

b. Explain how the parents December 31, 2022 pre-consolidation Equity Investment balance of $1,408,000 was determined.

Under the cost method, it is the original purchase price plus dividends received by the subsidiary since acquisition.

Under the cost method, it is the original purchase price for the subsidiary.

Under the cost method, it is the original purchase price plus equity income and minus dividends received by the subsidiary since acquisition.

c. For the year ended December 31, 2022, reconcile the parent companys pre-consolidation net income of $1,360,000 to the consolidated balance of $1,448,000.

Do not use negative signs with your answers.

Parent Income (cost method)	$
Deduct: p% of subsidiary dividends
Add:p% of subsidiary net incomep% of AAP amortization for year
Deduct:p% of subsidiary net incomep% of AAP amortization for year
Parent Income (equity method)	$

d. What was the subsidiarys retained earnings balance on the acquisition date? You should assume the Common Stock and APIC have not changed since the acquisition date. (Hint: You will need to use an account that does not change after the acquisition date.)

$

e. Why arent the Stockholders Equity accounts of the subsidiary reflected in the consolidated balance sheet?

The subsidiarys stockholders equity is not held by a party outside of the economic entity represented in the consolidated financial statements and, as a result, should not be included in the consolidated stockholders equity.

The subsidiarys stockholders equity is held by a party outside of the economic entity represented in the consolidated financial statements and, as a result, should not be included in the consolidated stockholders equity.

The subsidiarys stockholders equity is held by a party outside of the economic entity represented in the consolidated financial statements and, as a result, is reflected in the Equity Investment account on the consolidated balance sheet rather than be included in the consolidated stockholders equity.

f. Provide the consolidation entries for the year ending December 31, 2022.

Consolidation Journal
	Description	Debit	Credit
[ADJ]	BOY Retained Earnings - ParentBOY Retained Earnings - SubsidiaryDividendsEquity investmentGoodwillInvestment incomeOperating expensesPPE, net
	BOY Retained Earnings - ParentBOY Retained Earnings - SubsidiaryDividendsEquity investmentGoodwillInvestment incomeOperating expensesPPE, net
[C]	BOY Retained Earnings - ParentBOY Retained Earnings - SubsidiaryDividendsEquity investmentGoodwillInvestment incomeOperating expensesPPE, net
	BOY Retained Earnings - ParentBOY Retained Earnings - SubsidiaryDividendsEquity investmentGoodwillInvestment incomeOperating expensesPPE, net
[E]	Common Stock
	APIC
	BOY Retained Earnings - ParentBOY Retained Earnings - SubsidiaryDividendsEquity investmentGoodwillInvestment incomeOperating expensesPPE, net
	BOY Retained Earnings - ParentBOY Retained Earnings - SubsidiaryDividendsEquity investmentGoodwillInvestment incomeOperating expensesPPE, net
[A]	PPE, net
	Patent
	BOY Retained Earnings - ParentBOY Retained Earnings - SubsidiaryDividendsEquity investmentGoodwillInvestment incomeOperating expensesPPE, net
	BOY Retained Earnings - ParentBOY Retained Earnings - SubsidiaryDividendsEquity investmentGoodwillInvestment incomeOperating expensesPPE, net
[D]	BOY Retained Earnings - ParentBOY Retained Earnings - SubsidiaryDividendsEquity investmentGoodwillInvestment incomeOperating expensesPPE, net
	BOY Retained Earnings - ParentBOY Retained Earnings - SubsidiaryDividendsEquity investmentGoodwillInvestment incomeOperating expensesPPE, net
	Patent