Assume that the parent company acquires its subsidiary on January 1, 2016, by exchanging 40,000 shares of it $1 par value Common Stock, with a market value on the acquisition date of $35 per share, for all of the outstanding voting shares of the acquiree. You have been charged with preparing the consolidation of these two companies at the end of the first year. In your analysis of the subsidiary, you value all of the subsidiary's assets and liabilities at an amount equaling their book values except for the following: PPE assets are undervalued by $100,000 (depreciation =5,000 per year), and the subsidiary has an unrecorded Patent that you value at $300,000 (amortization=$30,000 per year). The parent views any remaining difference between the purchase price and the fair value of the identifiable assets results from expected synergies that it expects to realize as a result of the business combination.

a. Prepare the journal entry to record the acquisition pf the subsidiary

b. Show the computations to yield the equity income of $196,000 reported by the parent in its income statement.

c. Show the computations to yield the Equity Investment reported by the parent in the amount of $1,861,350

d. Prepare the consolidation entries for the year ended December 31, 2016

e. Prepare the consolidated balance sheet on December 31, 2016

f. What additional assets have been recognized on the consolidated balance sheet that were not explicitly reported in the balance sheets of either the parent or the subsidiary? Why were they not previously reported in the pre-acquisition financial statements of the parent or the subsidiary?

Parent Subsidiary Subsidiary Parent Balance sheet: Assets Income statement: Sales Cost of goods sold. Gross profit. Equity income. Operating expenses $1,650,000 (990,000) 660,000 Cash.. $5,500,000 (3,850,000) 1,650,000 196,000 (1,045,000) $ 801,000 $ 425,150 382,800 491,700 $ 265,950 704,000 1,067,000 1,861,350 4,032,600 $7.930,900 Accounts receivable Inventory ... Equity Investment.. Property, plant and equipment (PPE), net (429,000) $ 231,000 Net income 909,700 $2,209,350 Statement of retained earnings: BOY retained earnings. $2,856,000 Net income. 801,000 Dividends (160,200) Ending retained earnings .. $3,496,800 $ 852,500 231,000 (34,650) $1,048,850 $ 402,600 478,500 Liabilities and stockholders' equity Accounts payable. Accrued liabilities Long-term liabilities Common stock APIC..... Retained earnings 0 629,000 2,924,000 3,496,800 $7,930,900 $ 157,300 205,700 550,000 110,000 137,500 1,048,850 $2,209,350 Parent Subsidiary Subsidiary Parent Balance sheet: Assets Income statement: Sales Cost of goods sold. Gross profit. Equity income. Operating expenses $1,650,000 (990,000) 660,000 Cash.. $5,500,000 (3,850,000) 1,650,000 196,000 (1,045,000) $ 801,000 $ 425,150 382,800 491,700 $ 265,950 704,000 1,067,000 1,861,350 4,032,600 $7.930,900 Accounts receivable Inventory ... Equity Investment.. Property, plant and equipment (PPE), net (429,000) $ 231,000 Net income 909,700 $2,209,350 Statement of retained earnings: BOY retained earnings. $2,856,000 Net income. 801,000 Dividends (160,200) Ending retained earnings .. $3,496,800 $ 852,500 231,000 (34,650) $1,048,850 $ 402,600 478,500 Liabilities and stockholders' equity Accounts payable. Accrued liabilities Long-term liabilities Common stock APIC..... Retained earnings 0 629,000 2,924,000 3,496,800 $7,930,900 $ 157,300 205,700 550,000 110,000 137,500 1,048,850 $2,209,350