Question
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
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 |
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