Consolidation at the end of the first year subsequent to date of acquisitionEquity method (purchase price equals book value)

Assume that a parent company acquires its subsidiary on January 1, 2016, by exchanging 40,000 shares of its $1 par value Common Stock, with a market value on the acquisition date of $28 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. On the acquisition date, all of the subsidiarys assets and liabilities had fair values equaling their book values. Following are financial statements of the parent and its subsidiary for the year ended December 31, 2016.

				Parent		Subsidiary								Parent		Subsidiary
Income statement									Balance sheet
Sales				$ 2,960,000		$ 1,680,000			Assets
Cost of goods sold				(2,072,000)		(1,008,000)			Cash					$ 701,920		$ 432,880
Gross profit				888,000		672,000			Accounts receivable					378,880		389,760
Equity income				235,200		-			Inventory					574,240		500,640
Operating expenses				(562,400)		(436,800)			Equity investment					1,319,920		-
Net income				$ 560,800		$ 235,200			Property, plant & equipment					2,170,240		926,240
Statement of retained earnings														$ 5,145,200		$ 2,249,520
BOY retained earnings				1,881,600		868,000			Liabilities and stockholders' equity
Net income				560,800		235,200			Accounts payable					$ 216,640		$ 160,160
Dividends				(112,160)		(35,280)			Accrued liabilities					257,520		209,440
Ending retained earnings				$ 2,330,240		$ 1,067,920			Long-term liabilities					-		560,000
									Common stock					414,400		112,000
									APIC					1,926,400		140,000
									Retained earnings					2,330,240		1,067,920
														$ 5,145,200		$ 2,249,520

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

General Journal
Description	Debit	Credit
AnswerCommon stockDividendsEquity incomeEquity investmentNet incomeRetained earnings	Answer	Answer
AnswerCommon stockDividendsEquity incomeEquity investmentNet incomeRetained earnings	Answer	Answer
Additional paid paid in capital	Answer	Answer

b. Show the computations to yield the Equity Investment reported by the parent in the amount of $1,319,920 Do not use negative signs with your answers.

Equity investment at 1/1/16		$Answer
Plus:AnswerCommon stockDividendsEquity incomeEquity investmentNet incomeRetained earnings		Answer
Less:AnswerCommon stockDividendsEquity incomeEquity investmentNet incomeRetained earnings		Answer
Equity investment at 12/31/16		$Answer

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

Consolidation Journal
	Description						Debit	Credit
[C]	AnswerCommon stockDividendsEquity incomeEquity investmentNet incomeRetained earnings						Answer	Answer
	AnswerCommon stockDividendsEquity incomeEquity investmentNet incomeRetained earnings						Answer	Answer
	Equity investment						Answer	Answer
[E]	Common stock						Answer	Answer
	APIC						Answer	Answer
	AnswerCommon stockDividendsEquity incomeEquity investmentNet incomeRetained earnings						Answer	Answer
	AnswerCommon stockDividendsEquity incomeEquity investmentNet incomeRetained earnings						Answer	Answer

d. Prepare the consolidated spreadsheet for the year ended December 31, 2016. Use negative signs with answers in the Consolidated column for reductions (Cost of goods sold, Operating expenses and Dividends).

				Consolidation Worksheet
	Parent	Subsidiary		Dr	Cr		Consolidated
Income statement:
Sales	$2,960,000	$1,680,000					$Answer
Cost of goods sold	(2,072,000)	(1,008,000)					Answer
Gross profit	888,000	672,000					$Answer
Equity income	235,200		Answer[C][E][A][D][I]	Answer			Answer
Operating expenses	(562,400)	(436,800)					Answer
Net income	$560,800	$235,200					$Answer
Statement of retained earnings:
BOY retained earnings	$1,881,600	$868,000	Answer[C][E][A][D][I]	Answer			$Answer
Net income	560,800	235,200					Answer
Dividends	(112,160)	(35,280)			Answer	Answer[C][E][A][D][I]	Answer
Ending retained earnings	$2,330,240	$1,067,920					$Answer
Balance sheet:
Assets
Cash	$701,920	$432,880					$Answer
Accounts receivable	378,880	389,760					Answer
Inventory	574,240	500,640					Answer
Equity investment	1,319,920				Answer	[C]	Answer
					Answer	Answer[C][E][A][D][I]
Property, plant and equipment (PPE), net	2,170,240	926,240					Answer
	$5,145,200	$2,249,520					$Answer
Liabilities and stockholders equity
Accounts payable	$216,640	$160,160					$Answer
Accrued liabilities	257,520	209,440					Answer
Long-term liabilities	-	560,000					Answer
Common stock	414,400	112,000	Answer[C][E][A][D][I]	Answer			Answer
APIC	1,926,400	140,000	Answer[C][E][A][D][I]	Answer			Answer
Retained earnings	2,330,240	1,067,920					Answer
	$5,145,200	$2,249,520		$Answer	$Answer		$Answer