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 1,2016, by exchanging 40,000 shares of its 51 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 838,000 665,000 Accounts receivable 378,830 309,760 Equity income 228,200 Inventory 574,240 500,640 Operating expenses (562,400) (436,800) Equity investment 1,239,920 Net income $ 553,000 $ 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 + 0 0 ooo Additional paid in capital 0 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 $ 0 Plus Less: Equity investment at 12/31/16 $ 0 0 0 C. Prepare the consolidation entries for the year ended December 31,2016. Consolidation Journal Description Debit Credit [C] 0 0 0 0 Equity investment 0 0 (E) Common stock 0 APIC 0 0 0 0 0 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: $2.960,000 $1.673,000 0 Cost of goods sold (2,072,000) (1,000,000) 0 Gross profit 888,000 665,000 0 Equity income 228,200 IC] 0 0 Operating expenses (562,400) (436,800) 0 Net Income $553,800 $228,200 $ Statement of retained earnings: BOY retained earnings $1,881,600 $868.000 6 0 0 Sales $ 0 Consolidation Worksheet Dr Cr Parent Subsidiary Consolidated $ 0 0 0 $2,960,000 $1,673,000 12.072,000) (1,008,000) 888,000 665,000 228.200 (562,400) (436,800) $553,800 $228,200 [C) 0 0 DO $ 0 $ 0 Income statement: Sales Cost of goods sold Gross profit Equity income Operating expenses Net income Statement of retained earnings: BOY retained earnings Net income Dividends Ending retained earnings Balance sheet: Assets Cash Accounts receivable Inventory Equity investment $1,881,600 $868,000 (E) 553,800 228,200 (112,160) (28,280) $2,323,240 $1,067,920 0 0 0 C] $ $ 0 $694,920 378,880 574,240 1,239,920 $432,880 309,760 500,640 0 0 0 0 ICI 0 E) 0 $ 0 $ 0 0 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 IE) APIC 1,846,400 60,000 (E) Retained earnings 2,323,240 1,067,920 $5,058,200 $2,169,520 0 0 0 0 0 0 0 $ OS 0