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 $26 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 subsidiary's 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		$ 1,673,000			Assets
Cost of goods sold				(2,072,000)		(1,008,000)			Cash					$ 694,920		$ 432,880
Gross profit				888,000		665,000			Accounts receivable					378,880		309,760
Equity income				228,200		-			Inventory					574,240		500,640
Operating expenses				(562,400)		(436,800)			Equity investment					1,239,920		-
Net income				$ 553,800		$ 228,200			Property, plant & equipment					2,170,240		926,240
Statement of retained earnings														$ 5,058,200		$ 2,169,520
BOY retained earnings				1,881,600		868,000			Liabilities and stockholders' equity
Net income				553,800		228,200			Accounts payable					$ 216,640		$ 160,160
Dividends				(112,160)		(28,280)			Accrued liabilities					257,520		209,440
Ending retained earnings				$ 2,323,240		$ 1,067,920			Long-term liabilities					-		560,000
									Common stock					414,400		112,000
									APIC					1,846,400		60,000
									Retained earnings					2,323,240		1,067,920
														$ 5,058,200		$ 2,169,520

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

General Journal
Description	Debit	Credit
Common stockDividendsEquity incomeEquity investmentRetained earnings
Common stockDividendsEquity incomeEquity investmentRetained earnings
Additional paid paid in capital

b. Show the computations to yield the Equity Investment reported by the parent in the amount of $1,239,920. Do not use negative signs with your answers.

Equity investment at 1/1/16
Common stockDividendsEquity incomeEquity investmentRetained earnings
Common stockDividendsEquity incomeEquity investmentRetained earnings
Equity investment at 12/31/16

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

Consolidation Journal
	Description						Debit	Credit
[C]	Common stockDividendsEquity incomeEquity investmentRetained earnings
	Common stockDividendsEquity incomeEquity investmentRetained earnings
	Equity investment
[E]	Common stock
	APIC
	Common stockDividendsEquity incomeEquity investmentRetained earnings
	Common stockDividendsEquity incomeEquity investmentRetained earnings

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	$1,673,000
Cost of goods sold	(2,072,000)	(1,008,000)
Gross profit	888,000	665,000
Equity income	228,200		[C]
Operating expenses	(562,400)	(436,800)
Net income	$553,800	$228,200
Statement of retained earnings:
BOY retained earnings	$1,881,600	$868,000	[E]
Net income	553,800	228,200
Dividends	(112,160)	(28,280)				[C]
Ending retained earnings	$2,323,240	$1,067,920
Balance sheet:
Assets
Cash	$694,920	$432,880
Accounts receivable	378,880	309,760
Inventory	574,240	500,640
Equity investment	1,239,920					[C]
						[E]
Property, plant and equipment (PPE), net	2,170,240	926,240
	$5,058,200	$2,169,520
Liabilities and stockholders' equity
Accounts payable	$216,640	$160,160
Accrued liabilities	257,520	209,440
Long-term liabilities	-	560,000
Common stock	414,400	112,000	[E]
APIC	1,846,400	60,000	[E]
Retained earnings	2,323,240	1,067,920
	$5,058,200	$2,169,520