Consolidation at the end of the first year subsequent to date of acquisition-Equity method (purchase price equals book value) Assume that a parent company acquires its subsidiary on January 1, 2019, by exchanging 30,000 shares of its $1 par value Common Stock, with a market value on the acquisition date of $20 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. The parent uses the equity method of pre-consolidation Equity investment bookkeeping. Following are financial statements of the parent and its subsidiary for the year ended December 31, 2019. Parent Subsidiary Parent Subsidiary Income statement Balance sheet Sales $3,000,000 $1,740,000 Assets Cost of goods sold (1,600,000) (960,000) Cash $ 240,000 Gross profit 1,400,000 780,000 Accounts receivable 400,000 $ 100,000 360,000 Equity income 180,000 Inventory 620,000 430,000 Operating expenses (1,200,000) (600,000) Equity investment 730,000 Net income $380,000 $ 180,000 Property, plant & equipment 1,700,000 840,000 Statement of retained earnings $3,690,000 $1,730,000 BOY retained earnings 1,000,000 Net income 380,000 100,000 Liabilities and stockholders' equity 180,000 Accounts payable $ 250,000 $ 160,000 Dividends (140,000) (50,000) Accrued liabilities 300,000 240,000 Ending retained earnings $ 1,240,000 $230,000 Long-term liabilities 600,000 Common stock 500,000 200,000 APIC 1,400,000 300,000 Retained earnings 1,240,000 230,000 $3,690,000 $1,730,000 a. Prepare the journal entry to record the acquisition of the subsidiary. General Journal Description Debit Credit 0 0 0 Additional paid in capital 0 0 b. Show the computations to yield the Equity Investment reported by the parent in the amount of $730,000 Do not use negative signs with your answers. Equity investment at 1/1/19 s 0 Plus: 0 Less: 0 Equity investment at 12/31/19 $ 0 c. Prepare the consolidation entries for the year ended December 31, 2019. Consolidation Journal Description Debit Credit [C] 0 0 0 0 Equity investment 0 0 [E] Common stock 0 0 APIC 0 0 0 0 0 0 d. Prepare the consolidated spreadsheet for the year ended December 31, 2019. Use negative signs with answers in the Consolidated column for reductions (Cost of goods sold, Operating expenses and Dividends). Consolidation Worksheet Income statement: Parent Subsidiary Sales $3,000,000 $1,740,000 Cost of goods sold (1,600,000) (960,000) Dr Cr Consolidated $ 0 Use negative signs with answers in the Consolidated column for reductions (Cost of goods sold, Operating expenses and Dividends). Consolidation Worksheet Parent Subsidiary Dr Income statement: Sales $3,000,000 $1,740,000 Cost of goods sold (1,600,000) (960,000) Gross profit 1,400,000 780,000 Equity income 180,000 [C] 0 Operating expenses (1,200,000) (600,000) Net income $380,000 $180,000 Statement of retained earnings: BOY retained earnings $1,000,000 Net income Dividends Ending retained earnings $100,000 [E] 380,000 180,000 (140,000) (50,000) $1,240,000 $230,000 0 Balance sheet: Assets Cr Consolidated $ 0 0 0 0 0 0 $ 0 0 0 [C] 0 $ 0 Cash $240,000 $100,000 $ 0 Accounts receivable Inventory Equity investment 400,000 360,000 620,000 430,000 730,000 0 0 0 [C] 0 0 [E] Property, plant and equipment (PPE), net 1,700,000 840,000 $3,690,000 $1,730,000 0 $ 0 Liabilities and stockholders' equity Accounts payable $250,000 $160,000 0 Accrued liabilities 300,000 240,000 0 Long-term liabilities Common stock 600,000 0 APIC Retained earnings 500,000 200,000 [E] 1,400,000 300,000 [E] 1,240,000 230,000 0 0 0 0 $3,690,000 $1,730,000 0 0 S 0