Question
Assume that, on January 1, 2019, a parent company acquired a 70% interest in its subsidiary for a purchase price that was $400,000 over the
Assume that, on January 1, 2019, a parent company acquired a 70% interest in its subsidiary for a purchase price that was $400,000 over the book value of the subsidiary's Stockholders' Equity on the acquisition date.The parent uses the equity method to account for its investment in the subsidiary. The parent assigned the acquisition-date AAP as follows:
AAP Items
Initial Fair Value
Useful Life (years)
PPE
400,000
10
Assume that the parent sells inventory to the subsidiary (downstream) which includes that inventory in products that it, ultimately, sells to customers outside of the controlled group. You have compiled the following data as of 2021 and 2022:
2021
2022
Transfer price for inventory sale
$85,000
$125,000
Cost of goods sold
-65,000
-100,000
Gross profit
$20,000
$25,000
% inventory remaining
30%
30%
Gross profit deferred
$6,000
$7,500
EOY Receivable/Payable
$18,000
$20,000
The inventory not remaining at the end of the year has been sold outside of the controlled group.
The parent and the subsidiary report the following financial statements at December 31, 2022:
Income Statement
Parent
Subsidiary
Sales
$3,500,000
$600,000
Cost of goods sold
-2,800,000
-480,000
Gross Profit
700,000
120,000
Income (loss) from subsidiary
9,000
Operating expenses
-340,000
-65,000
Net income
$369,000
$55,000
Statement of Retained Earnings
Parent
Subsidiary
BOY Retained Earnings
$5,302,000
$850,000
Net income
369,000
55,000
Dividends
-60,000
-18,000
EOY Retained Earnings
$5,611,000
$887,000
Balance Sheet
Parent
Subsidiary
Assets:
Cash
$780,000
$215,000
Accounts receivable
1,051,600
210,000
Inventory
1,250,000
195,000
Equity Investment
892,350
PPE, net
5,773,050
1,400,000
$9,747,000
$2,020,000
Liabilities and Stockholders' Equity:
Current Liabilities
$751,000
$500,000
Long-term Liabilities
2,070,000
474,500
Common Stock
450,000
42,000
APIC
865,000
116,500
Retained Earnings
5,611,000
887,000
$9,747,000
$2,020,000
Required:
a.Compute the EOY Equity Investment balance of $892,350 (4 years subsequent to the acquisition).
b.Compute the EOY noncontrolling interest equity balance
c.Prepare the consolidation (elimination) entries
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Financial Shenanigans
Authors: Howard Schilit
2nd Edition
0071386262, 9780071386265
