Assume that a parent company acquired its subsidiary on January 1, 2011, at a purchase price that was $320,000 in excess of the book value of the subsidiary's Stockholders' Equity on the acquisition date. Of that excess, $220,000 was assigned to an unrecorded Patent owned by the subsidiary that is being amortized over a 10-year period. The [A] Patent asset has been amortized as part of the parent's equity method accounting. The remaining $100,000 was assigned to Goodwill. In 2012, the wholly owned subsidiary sold Land to the parent for $90,000. The Land was reported on the subsidiary's balance sheet for $70,000 on the date of sale. The parent uses the equity method to account for its Equity Investment.

Financial statements of the parent and its subsidiary for the year ended December 31, 2013 are presented in d. below:

a. Show the computation to yield the $34,500 of Income (loss) from subsidiary reported by the parent for the year ended December 31, 2013.

Note: Use a negative sign with an answer to indicate a reduction in the computation.

Net income of subsidiary
CashAccounts receivableInventoryPPE, netPatentGoodwillAccounts payableOther current liabilitiesLong-term liabilitiesNet income of subsidiarySalesCost of goods soldPrior year intercompany gross profitCurrent year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investment
Current year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investmentAPICCommon stockBOY retained earningsEOY retained earningsBOY unamortized AAPBOY deferred profitIncome (loss) from subsidiaryDividendsGain on intercompany sale of landLoss on intercompany sale of land

b. Show the computation to yield the $533,675 Equity Investment account balance reported by the parent on December 31, 2013.

Note: Use a negative sign with an answer to indicate a reduction in the computation.

Common stock
APIC
EOY Retained earnings
EOY Unamortized AAP
Gain on intercompany sale
Equity investment

c. Prepare the consolidation entries for the year ended December 31, 2013.

Consolidation Worksheet
	Description	Debit	Credit
[C]	Current year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investmentAPICCommon stockBOY retained earningsEOY retained earningsBOY unamortized AAPBOY deferred profitIncome (loss) from subsidiaryDividendsGain on intercompany sale of landLoss on intercompany sale of land
	Dividends
	Cost of goods soldPrior year intercompany gross profitCurrent year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investmentAPICCommon stockBOY retained earningsEOY retained earningsBOY unamortized AAPBOY deferred profitDividendsGain on intercompany sale of landLoss on intercompany sale of land
[E]	Common stock
	APIC
	AAP depreciationOperating expensesNet incomeEquity investmentAPICCommon stockBOY retained earningsEOY retained earningsBOY unamortized AAPBOY deferred profitDividendsGain on intercompany sale of landLoss on intercompany sale of land
	CashAccounts receivableInventoryPPE, netPatentGoodwillAccounts payableOther current liabilitiesLong-term liabilitiesNet income of subsidiarySalesCost of goods soldPrior year intercompany gross profitCurrent year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investment
[A]	Patent
	CashAccounts receivableInventoryPPE, netPatentGoodwillAccounts payableOther current liabilitiesLong-term liabilitiesNet income of subsidiarySalesCost of goods soldPrior year intercompany gross profitCurrent year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investment
	CashAccounts receivableInventoryPPE, netPatentGoodwillAccounts payableOther current liabilitiesLong-term liabilitiesNet income of subsidiarySalesCost of goods soldPrior year intercompany gross profitCurrent year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investment
[D]	CashAccounts receivableInventoryAAP depreciationOperating expensesNet incomeEquity investmentAPICCommon stockBOY retained earningsEOY retained earningsBOY unamortized AAPBOY deferred profitEquity incomeDividendsGain on intercompany sale of landLoss on intercompany sale of land
	CashAccounts receivableInventoryPPE, netPatentGoodwillAccounts payableOther current liabilitiesLong-term liabilitiesNet income of subsidiarySalesCost of goods soldPrior year intercompany gross profitCurrent year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investment
[Igain]	Current year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investmentAPICCommon stockBOY retained earningsEOY retained earningsBOY unamortized AAPBOY deferred profitDividendsGain on intercompany sale of landLoss on intercompany sale of land
	CashAccounts receivableInventoryPPE, netPatentGoodwillAccounts payableOther current liabilitiesLong-term liabilitiesNet income of subsidiarySalesCost of goods soldPrior year intercompany gross profitCurrent year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investment

d. Prepare the consolidation spreadsheet for the year ended December 31, 2013.

Use negative signs with answers in the Consolidated column for Cost of goods sold, Operating expenses and Dividends.

				Elimination Entries
Income statement:	Parent	Sub		Dr	Cr		Consolidated
Sales	$3,000,000	$379,000
Cost of goods sold	(2,100,000)	(225,000)
Gross profit	900,000	154,000
Income (loss) from subsidiary	34,500		[C]
Operating expenses	(570,000)	(97,500)	[D]
Net income	$364,500	$56,500
Statement of retained earnings:
BOY retained earnings	$1,477,200	$193,750	[E]
Net income	364,500	56,500
Dividends	(85,375)	(6,825)				[C]
EOY retained earnings	$1,756,325	$243,425
Balance sheet:
Assets
Cash	$341,566	$125,211
Accounts receivable	384,000	87,000
Inventory	582,000	111,750
PPE, net	2,799,600	206,750				[Igain]
Patent			[A]			[D]
Goodwill			[A]
Equity investment	533,675		[Igain]			[C]
						[E]
						[A]
	$4,640,841	$530,711
Liabilities and stockholders' equity
Accounts payable	$224,700	$44,760
Other currentliabilities	276,816	61,276
Long-term liabilities	1,500,000	125,000
Common stock	490,500	25,000	[E]
APIC	392,500	31,250	[E]
Retained earnings	1,756,325	243,425
	$4,640,841	$530,711