Question
Consolidation spreadsheet for continuous sale of inventory - Equity method Assume that a parent company acquired a subsidiary on January 1, 2016. The purchase price
Consolidation spreadsheet for continuous sale of inventory - Equity method Assume that a parent company acquired a subsidiary on January 1, 2016. The purchase price was $600,000 in excess of the subsidiarys book value of Stockholders Equity on the acquisition date, and that excess was assigned to the following AAP assets:
AAP Asset | Original Amount | Original Useful Life (years) |
---|---|---|
Property, plant and equipment (PPE), net | $120,000 | 20 |
Customer list | 210,000 | 10 |
Royalty agreement | 150,000 | 10 |
Goodwill | 120,000 | indefinite |
$600,000 |
The AAP assets with a definite useful life have been amortized as part of the parents 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 2018 and 2019:
Inventory Sales | Gross Profit Remaining in Unsold Inventory | Receivable (Payable) | |
---|---|---|---|
2019 | $81,600 | $24,000 | $32,400 |
2018 | $51,600 | $14,400 | $15,600 |
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, 2019, follow in part d below.
a. Show the computation to yield the pre-consolidation $80,400 Income loss from subsidiary reported by the parent during 2019.
CashAccounts receivableInventoryPPE, netCustomer listRoyalty agreementGoodwillAccounts payableOther current liabilitiesLong-term liabilitiesNet income of subsidiarySalesCost of goods soldPrior year intercompany gross profitCurrent year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investmentAPICCommon stockBOY retained earningsEOY retained earningsBOY unamortized AAPDividends | ||
Plus: | AnswerCashAccounts receivableInventoryPPE, netCustomer listRoyalty agreementGoodwillAccounts payableOther current liabilitiesLong-term liabilitiesNet income of subsidiarySalesCost of goods soldPrior year intercompany gross profitCurrent year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investmentAPICCommon stockBOY retained earningsEOY retained earningsBOY unamortized AAPDividends | |
Less: | CashAccounts receivableInventoryPPE, netCustomer listRoyalty agreementGoodwillAccounts payableOther current liabilitiesLong-term liabilitiesNet income of subsidiarySalesCost of goods soldPrior year intercompany gross profitCurrent year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investmentAPICCommon stockBOY retained earningsEOY retained earningsBOY unamortized AAPDividends | |
AAP depreciation | ||
Income (loss) from subsidiary |
b. Show the computation to yield the Equity Investment balance of $1,152,000 reported by the parent at December 31, 2019.
Common stock | |
APIC | |
Retained earnings | |
BOY unamortized AAP | |
BOY deferred profit | |
Income (loss) from subsidiary | |
Dividends | |
Equity investment |
c. Prepare the consolidation entries for the year ended December 31, 2019.
d. Prepare the consolidation spreadsheet for the year ended December 31, 2019.
Elimination Entries | |||||||
---|---|---|---|---|---|---|---|
Parent | Sub | Dr | Cr | Consolidated | |||
Income statement: | |||||||
Sales | $5,160,000 | $939,600 | [Isales] | ||||
Cost of goods sold | (3,600,000) | (564,000) | [Icogs] | [Icogs] | |||
[Isales] | |||||||
Gross profit | 1,560,000 | 375,600 | |||||
Income (loss) from subsidiary | 80,400 | [C] | |||||
Operating expenses | (996,000) | (243,600) | [D] | ||||
Net income | $644,400 | $132,000 | |||||
Statement of retained earnings: | |||||||
BOY retained earnings | $2,619,600 | $486,000 | [E] |
| |||
Net income | 644,400 | 132,000 | |||||
Dividends | (144,000) | (18,000) | [C] | ||||
EOY retained earnings | $3,120,000 | $600,000 | |||||
Balance sheet: | |||||||
Assets | |||||||
Cash | $756,000 | $300,000 | |||||
Accounts receivable | 672,000 | 228,000 | [Ipay] | ||||
Inventory | 1,020,000 | 276,000 | [Icogs] | ||||
PPE, net | 4,800,000 | 516,000 | [A] | [D] | |||
Customer List | [A] | [D] | |||||
Royalty agreement | [A] | [D] | |||||
Goodwill | [A] | ||||||
Equity investment | 1,152,000 | [Icogs] | [C] | ||||
[E] | |||||||
Answer | [A] | ||||||
$8,400,000 | $1,320,000 | ||||||
Liabilities and stockholders equity | |||||||
Accounts payable | $360,000 | $110,400 | [Ipay] | ||||
Other current liabilities | 480,000 | 152,400 | |||||
Long-term liabilities | 3,000,000 | 313,200 | |||||
Common stock | 816,000 | 60,000 | [E] | Answer | Answer | ||
APIC | 624,000 | 84,000 | [E] | ||||
Retained earnings | 3,120,000 | 600,000 | |||||
$8,400,000 | $1,320,000 |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started