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Determining ending consolidated balances in the second year following the acquisition-Equity method Assume that your company acquired a subsidiary on January 1, 2012. The purchase
Determining ending consolidated balances in the second year following the acquisition-Equity method Assume that your company acquired a subsidiary on January 1, 2012. The purchase price was $700,000 in excess of the subsidiary's book value of Stockholders' Equity on the acquisition date, and that excess was assigned to the following [A] assets: Original Original Useful Life [A] Asset Amount (years) Property, plant and equipment (PPE), net $350,000 20 Goodwill 350,000 Indefinite $700,000 The AAP asset relating to undervalued PPE with a 20-year useful life has been depreciated as part of the parent's equity method accounting. The financial statements of the parent and its subsidiary for the year ended December 31, 2013, are as follows: Parent Subsidiary Parent Subsidiary Income Balance statement: sheet: Sales $5,500,000 $1,205,000 Assets Cost of goods sold (3,960,000) (720,000) Cash $928,050 $314,200 Accounts Gross profit 1,540,000 485,000 receivable 1,403,000 278,400 Equity income 155,500 Inventory 2,134,000 357,600 Operating Equity expenses ( (825,000) (312,000) investment 1,612,800 Property plant and equipment Net income $870,500 $173,000 (PPE), net 11,365,200 661,600 $17,443,050 $1,611,800 Statement of retained earnings: Liabilities and BOY retained earnings $3,711,800 stockholders $620,000 equity Accounts 173,000 payable Net income 870,500 $805,200 $114,400 Net income 870,500 $805,200 $114,400 Accounts 173,000 payable Accrued (25,200) liabilities (176,100) 957,000 149,600 Dividends Ending retained earnings $4,406,200 7,000,000 400,000 Long-term $767,800 liabilities Common stock APIC Retained earnings 507,450 3,767,200 80,000 100,000 4,406,200 767,800 $17,443,050 $1,611,800 $ $ $ At what amount will the following accounts appear on the consolidated financial statements? Note: Do not use negative signs with your answers. a. Sales $ b. Equity income $ c. Operating expenses d. Accounts receivable e. Equity investment $ f. Property plant and equipment (PPE) net $ g. Goodwill h. Common stock i. Retained earnings $ $ A $ 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 $27 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 $1,675,000 Assets Cost of goods sold (2,072,000) (1,008,000) Cash $ 696,920 $ 432,880 Gross profit 888,000 667,000 Accounts receivable 378,880 349,760 Equity income 230,200 Inventory 574,240 500,640 Operating expenses (562.400) (436,800) Equity investment 1,279,920 Net income $ 555,800 $ 230,200 Property, plant & equipment 2,170,240 926,240 Statement of retained earnings $5,100,200 $ 2,209,520 BOY retained earnings 1,881,600 868,000 Liabilities and stockholders' equity Net income 555,800 230,200 Accounts payable $ 216,640 $ 160,160 Dividends (112,160) (30,280) Accrued liabilities 257,520 209,440 Ending retained earnings $ 2,325,240 $ 1,067,920 Long-term liabilities 560,000 Common stock 414,400 112,000 APIC 1,886,400 100,000 Retained earnings 2,325,240 1,067,920 $ 5,100,200 $ 2,209,520 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 $1,279,920 Do not use negative signs with your answers. Equity investment at 1/1/16 $ Plus: Less: Equity investment at 12/31/16 $ C. Prepare the consolidation entries for the year ended December 31, 2016. Consolidation Journal Description Debit Credit [C] Equity investment [E] Common stock APIC 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: Sales $2,960,000 $1,675,000 $ Cost of goods sold (2,072,000) (1,008,000) Gross profit 888,000 667,000 Equity income 230,200 [C] Operating expenses (562,400) (436,800) Net income $555,800 $230,200 $ Statement of retained earnings: BOY retained earnings $1,881,600 $868,000 [E] $ Net income 555,800 230,200 Dividends (112,160) (30,280) [C] Ending retained earnings $2.325,240 $1,067,920 $ Balance sheet: Assets Cash $696,920 $432,880 $ Accounts receivable 378,880 349,760 Inventory 574,240 500,640 Equity investment 1,279,920 [C] [E] Property, plant and equipment (PPE), net 2,170,240 926,240 $5,100,200 $2,209,520 $ Liabilities and stockholders' equity Accounts payable Accrued liabilities Long-term liabilities Common stock APIC Retained earnings $216,640 $160,160 257,520 209,440 560,000 414,400 112,000 [E] 1,886,400 100,000 [E] 2,325,240 1,067,920 $5,100,200 $2,209,520 $ $ $ Determining ending consolidated balances in the second year following the acquisition-Equity method Assume that your company acquired a subsidiary on January 1, 2012. The purchase price was $700,000 in excess of the subsidiary's book value of Stockholders' Equity on the acquisition date, and that excess was assigned to the following [A] assets: Original Original Useful Life [A] Asset Amount (years) Property, plant and equipment (PPE), net $350,000 20 Goodwill 350,000 Indefinite $700,000 The AAP asset relating to undervalued PPE with a 20-year useful life has been depreciated as part of the parent's equity method accounting. The financial statements of the parent and its subsidiary for the year ended December 31, 2013, are as follows: Parent Subsidiary Parent Subsidiary Income Balance statement: sheet: Sales $5,500,000 $1,205,000 Assets Cost of goods sold (3,960,000) (720,000) Cash $928,050 $314,200 Accounts Gross profit 1,540,000 485,000 receivable 1,403,000 278,400 Equity income 155,500 Inventory 2,134,000 357,600 Operating Equity expenses ( (825,000) (312,000) investment 1,612,800 Property plant and equipment Net income $870,500 $173,000 (PPE), net 11,365,200 661,600 $17,443,050 $1,611,800 Statement of retained earnings: Liabilities and BOY retained earnings $3,711,800 stockholders $620,000 equity Accounts 173,000 payable Net income 870,500 $805,200 $114,400 Net income 870,500 $805,200 $114,400 Accounts 173,000 payable Accrued (25,200) liabilities (176,100) 957,000 149,600 Dividends Ending retained earnings $4,406,200 7,000,000 400,000 Long-term $767,800 liabilities Common stock APIC Retained earnings 507,450 3,767,200 80,000 100,000 4,406,200 767,800 $17,443,050 $1,611,800 $ $ $ At what amount will the following accounts appear on the consolidated financial statements? Note: Do not use negative signs with your answers. a. Sales $ b. Equity income $ c. Operating expenses d. Accounts receivable e. Equity investment $ f. Property plant and equipment (PPE) net $ g. Goodwill h. Common stock i. Retained earnings $ $ A $ 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 $27 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 $1,675,000 Assets Cost of goods sold (2,072,000) (1,008,000) Cash $ 696,920 $ 432,880 Gross profit 888,000 667,000 Accounts receivable 378,880 349,760 Equity income 230,200 Inventory 574,240 500,640 Operating expenses (562.400) (436,800) Equity investment 1,279,920 Net income $ 555,800 $ 230,200 Property, plant & equipment 2,170,240 926,240 Statement of retained earnings $5,100,200 $ 2,209,520 BOY retained earnings 1,881,600 868,000 Liabilities and stockholders' equity Net income 555,800 230,200 Accounts payable $ 216,640 $ 160,160 Dividends (112,160) (30,280) Accrued liabilities 257,520 209,440 Ending retained earnings $ 2,325,240 $ 1,067,920 Long-term liabilities 560,000 Common stock 414,400 112,000 APIC 1,886,400 100,000 Retained earnings 2,325,240 1,067,920 $ 5,100,200 $ 2,209,520 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 $1,279,920 Do not use negative signs with your answers. Equity investment at 1/1/16 $ Plus: Less: Equity investment at 12/31/16 $ C. Prepare the consolidation entries for the year ended December 31, 2016. Consolidation Journal Description Debit Credit [C] Equity investment [E] Common stock APIC 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: Sales $2,960,000 $1,675,000 $ Cost of goods sold (2,072,000) (1,008,000) Gross profit 888,000 667,000 Equity income 230,200 [C] Operating expenses (562,400) (436,800) Net income $555,800 $230,200 $ Statement of retained earnings: BOY retained earnings $1,881,600 $868,000 [E] $ Net income 555,800 230,200 Dividends (112,160) (30,280) [C] Ending retained earnings $2.325,240 $1,067,920 $ Balance sheet: Assets Cash $696,920 $432,880 $ Accounts receivable 378,880 349,760 Inventory 574,240 500,640 Equity investment 1,279,920 [C] [E] Property, plant and equipment (PPE), net 2,170,240 926,240 $5,100,200 $2,209,520 $ Liabilities and stockholders' equity Accounts payable Accrued liabilities Long-term liabilities Common stock APIC Retained earnings $216,640 $160,160 257,520 209,440 560,000 414,400 112,000 [E] 1,886,400 100,000 [E] 2,325,240 1,067,920 $5,100,200 $2,209,520 $ $ $
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