Consolidation spreadsheet for continuous sale of inventory - Equity method Assume that a parent company acquired a subsidiary on January 1, 2010. The purchase price was $500,000 million in excess of the subsidiary's book value of Stockholders' Equity on the acquisition date, and that excess was assigned to the following AAP assets: Original Original Useful AAP Asset Amount Life (years) Property, plant and equipment (PPE), net $100,000 20 Customer list 180,000 Royalty agreement 120,000 Goodwill 100,000 indefinite $500,000 10 10 The AAP assets with a definite useful life have been amortized as part of the parent's equity method accounting. The Goodwill asset has been tested annually for impairment, and has not been found to be impaired. Assume that the parent company sells inventory to its wholly owned subsidiary. The subsidiary, ultimately, sells the inventory to customers outside of the consolidated group. You have compiled the following data for the years ending 2012 and 2013: Gross Profit Remaining Inventory in Unsold Receivable Sales Inventory (Payable) 2013 $68,000 $19,280 $27,100 2012 $43,700 $12,497 $13,137 The inventory not remaining at the end of the year has been sold to unaffiliated entities outside of the consolidated group. The parent uses the equity method to account for its Equity Investment. The financial statements of the parent and its subsidiary for the year ended December 31, 2013, follow in part d. below. a. Show the computation to yield the pre-consolidation $70,837 Income (loss) from subsidiary reported by the parent during 2013. Hint: Use negative signs with answers when appropriate. Net income of subsidiary 112,620 Plus: BOY unamortized AAP 12,497 Less: EOY retained earnings (19,280) AAP depreciation 35,000 X 70,837 Income (loss) from subsidiary - X X b. Show the computation to yield the Equity Investment balance of $961,089 reported by the parent at December 31, 2013. Hint: Use negative signs with answers when appropriate. Common stock APIC Retained earnings BOY unamortized AAP BOY deferred profit Income (loss) from subsidiary Dividends Equity investment 52,200 65,250 404,550 395,000 (12,497) 70,837 (14,251) 961,089 0 c. Prepare the consolidation journal entries for the year ended December 31, 2013. Consolidation Worksheet Description Debit Credit [C] Income (loss) from subsidiary 70,837 Dividends 14,251 Equity investment 0 56,586 [E] Common stock 52,200 0 APIC 65,250 0 BOY retained earnings 404,550 Equity investment 522,000 [A] PPE net 85,000 0 Customer list 126,000 0 Royalty agreement 84,000 0 Goodwill 100,000 0 Equity investment 0 395,000 [D] Operating expenses 35,000 0 PPE net 0 5,000 Customer list 0 18,000 Royalty agreement 0 12,000 [lcogs] Cost of goods sold 469,800 x 0 Inventory 469,800 x [Isales) Sales 786,000 x Equity investment 786,000 x [lcogs] Equity investment X 469,800 x 0 Cost of goods sold 469,800 x [lpay] Accounts payable 88,197 X Cash 88,197 X > > > X > 0 X 0 x X x d. Prepare the consolidation spreadsheet for the year ended December 31, 2013. Hint: Use negative signs with answers when appropriate. Elimination Entries Parent Sub Dr Cr Consolidated Income statement: Sales $4,370,000 $786,000 [lsales] 786,000 X $ 4,370,000 X Cost of goods sold (3,059,000) (469,800) [lcogs] 12,497 x 482,297 x [lcogs] (3,059,000) X 786,000 x [lsales] Gross profit 1,311,000 316,200 $ 1,311,000 X Income (loss) from subsidiary 70,837 [C] 70,837 Operating expenses (830,300) (203,580) [D] 35,000 (1,068,880) Net income $551,537 $112,620 $ 1,553,120 X Statement of retained earnings: BOY retained earnings $2.195,488 $404,550 404,550 $ 2,195,488 Net income 551,537 112,620 664,157 x Dividends (129,164) (14,251) 14,251 [0] (129,164) EOY retained earnings $2,617,861 $502,919 $ 2,730,481 x Balance sheet: Assets Cash $650,639 $256,087 $ 933,062 X Accounts receivable 559,360 181,656 154,556 x [lpay 586,460 x Inventory 847,780 233,334 12,497 x [lcogs] 1,068,617 X PPE, net 4,078,084 431,694 [A] 85,000 5,000 [D] 4,589,778 Customer List [A] 126,000 18,000 [D] 108,000 Royalty agreement [A] 84,000 12,000 [D 72,000 Goodwill [A] 100,000 100,000 Equity investment 961,089 [lcogs] 482,297 x 56,586 [C] 469,800 x 522,000 [E] 395,000 [A] $7,096,952 $1,102,771 7,927,717 x Liabilities and stockholders' equity Accounts payable $327,313 $93,459 [lpay] 154,556 x $ 266,216 x Other currentliabilities 403,228 127.943 531,171 Long-term liabilities 2.500,000 261,000 2,761,000 Common stock 714,495 52,200 [E] 52,200 714,495 APIC 534,055 65,250 [E] 65,250 534,055 Retained earnings 2,617,861 502,919 3,120,780 x $7,096,952 $1,102,771 $ 0X $ OX $ 7,927,717 X