Consolidation at the end of the first year subsequent to date of acquisitionCost method (purchase price equals book value) Assume that the parent company acquires its subsidiary on January 1, 2016, by exchanging 31,500 shares of its $1 par value Common Stock, with a market value on the acquisition date of $50 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	$3,330,000	$1,890,000		Assets
Cost of goods sold	(2,331,000)	(1,134,000)		Cash	$789,660	$486,990
Gross profit	999,000	756,000		Accounts receivable	426,240	438,480
Investment income	39,690	-		Inventory	646,020	563,220
Operating expenses	(632,700)	(491,400)		Equity investment	1,575,000	-
Net income	$405,990	$264,600		Property, plant & equipment	2,441,556	1,357,020
Statement of retained earnings					$5,878,476	$2,845,710
BOY retained earnings	2,116,800	976,500		Liabilities and stockholders' equity
Net income	405,990	264,600		Accounts payable	$243,756	$180,180
Dividends	(126,180)	(39,690)		Accrued liabilities	289,710	235,620
Ending retained earnings	$2,396,610	$1,201,410		Long-term liabilities	-	630,000
				Common stock	466,200	126,000
				APIC	2,482,200	472,500
				Retained earnings	2,396,610	1,201,410
					$5,878,476	$2,845,710

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

General Journal
Description	Debit	Credit
APICDividendsEquity investmentInvestment incomeNo entryRetained earnings
Common stock
APICDividendsEquity investmentInvestment incomeNo entryRetained earnings

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

If no consolidation entry is necessary for a particular step (i.e. ADJ, C, or E), select "No entry" as your answers for the journal descriptions.

Consolidation Journal
	Description	Debit	Credit
[ADJ]	APICDividendsEquity investmentInvestment incomeNo entryRetained earnings
	APICDividendsEquity investmentInvestment incomeNo entryRetained earnings
[C]	APICDividendsEquity investmentInvestment incomeNo entryRetained earnings
	APICDividendsEquity investmentInvestment incomeNo entryRetained earnings
[E]	Common stock
	APIC
	APICDividendsEquity investmentInvestment incomeNo entryRetained earnings
	APICDividendsEquity investmentInvestment incomeNo entryRetained earnings

c. Prepare the consolidated spreadsheet for the year ended December 31, 2016.

Hint: Some eliminating entries may not be necessary. If so, leave them blank.

Use negative signs with answers in the Consolidated column for Cost of goods sold, Operating expenses and Dividends.

Consolidation Worksheet
	Parent	Subsidiary			Debit	Credit		Consolidated
Income statement
Sales	$3,330,000	$1,890,000
Cost of goods sold	(2,331,000)	(1,134,000)
Gross profit	999,000	756,000
Investment income	39,690	-		[C]
Operating expenses	(632,700)	(491,400)
Net income	$405,990	$264,600
Statement of retained earnings
BOY retained earnings	$2,116,800	$976,500		[E]			[ADJ]
Net income	405,990	264,600
Dividends	(126,180)	(39,690)					[C]
Ending retained earnings	$2,396,610	$1,201,410
Balance sheet
Assets
Cash	$789,660	$486,990
Accounts receivable	426,240	438,480
Inventory	646,020	563,220
Equity investment	1,575,000	-		[ADJ]			[E]
PPE, net	2,441,556	1,357,020
	$5,878,476	$2,845,710
Liabilities and equity
Accounts payable	$243,756	$180,180
Accrued liabilities	289,710	235,620
Long-term liabilities	-	630,000
Common stock	466,200	126,000		[E]
APIC	2,482,200	472,500		[E]
Retained earnings	2,396,610	1,201,410			-	-
	$5,878,476	$2,845,710