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 $1 par value Common Stock, with a market value on the acquisition date of $31 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, 2016. Income statement Sales Cost of goods sold Gross prof Parent Subsidiary Balance sheet $2,960,000 $1,690,000 Assets (2,072,000) (1,008,000) Cash Parent Subsidiary Equity income 245,200 Operating expenses (562,400) Net income $570,800 -Inventory (436,800) Equity investment $245,200 Statement of retained earnings BOY retained earnings 1,881,600 Net income 868,000 Liabilities and stockholders' equity 245,200 Accounts payable Dividends (112,160) (45,280) Accrued liabilities Ending retained earnings $2,340,240 $1,067,920 Long-term liablities 888,000 682,000 Accounts receivable $711,920 $432,880 378,880 500,760 574,240 500,640 1,439,920 2,170,240 926,240 $5,275,200 $2,360,520 $216,640 $160,160 257,520 200,440 560,000 Property, plant & equipment Common stock APIC 414,400 112,000 2,046,400 260,000 Retained earnings 2,340,240 1,067,920 $5,275,200 $2,369,520 a. Prepare the journal entry to record the acquisition of the subsidiary. General Journal Description Debit Credit = Additional paid in capital b. Show the computations to yield the Equity Investment reported by the parent in the amount of $1,439,920. Do not use negative signs with your answers Equity investment at 1/1/16 $ Less 0 0 0 0 Equity investment at 12/31/16 5 c. Prepare the consolidation entries for the year ended December 31, 2016. Consolidation journal Description Debit Credit K 0 Equity investment 0 0 [E] Common stock 0 0 APIC 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). Parent Subsidiary Consolidation Worksheet Cr Consolidated