Equity method journal entries (price equals book value) Prepare journal entries for the transactions below relating to an Equity Investment accounted for using the equity method. a. An investor purchases 14,400 common shares of an investee at $5 per share; the shares represent 25% ownership in the investee and the investor concludes that it can exert significant influence over the investee. b. The investee reports net income of $48,000. c. The investor receives a cash dividend of $1.50 per common share from the investee. d. The investor sells all 14,400 common shares of the investee for $72,300. General Journal Ref. Description Debit Credit a. b. C. d. Equity investment Consolidation entries at date of acquisition (purchase price greater than book value) A parent company exchanges 2,500 shares of its $1 par value common stock, with a market value of $10/share, for all of the shares owned by the subsidiary's shareholders, resulting in a $25,000 total purchase price. On the acquisition date, the subsidiary reported a book value of Stockholders' Equity of $18,750, comprised of $7,500 of Common Stock and $11,250 of Retained Earnings. An examination of the subsidiary's balance sheet revealed that book values were equal to fair values for all assets except fo PPE (net), which has a book value of $10,000 and a fair value of $16,250. a. Prepare the entry that the parent makes to record the investment. General Journal Description Debit Credit Common stock b. Prepare the [E] and [A] consolidation entries. Consolidation Worksheet Description [E] Common stock Debit Credit to eliminate the stockholders' equity of subsidiary on the acquisition date [A] to record the [A] assets purchased on the acquisition date 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 Goodwill 350,000 Indefinite $700,000 20 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 statement: Balance sheet: Sales $5,500,000 $1,205,000 Assets Cost of goods sold (3,960,000) (720,000) Cash $928,050 $314,200 Gross profit 1,540,000 485,000 Accounts receivable 1,403,000 278,400 Equity income 155,500 Inventory 2,134,000 357,600 Operating expenses (825,000) (312,000) Equity investment 1,612,800 Net income $870,500 $173,000 Property, plant and equipment (PPE), net 11,365,200 661,600 $17,443,050 $1,611,800 Statemen retained earnings: BOY retained earnings $3,711,800 $620,000 Liabilities and stockholders' equity Net income 870,500 173,000 Accounts payable $805,200 $114,400 Dividends (176,100) (25,200) Accrued liabilities 957,000 149,600 Ending retained earnings $4,406,200 $767,800 Long-term liabilities 7,000,000 400,000 Common stock 507,450 80,000 APIC 3,767,200 100,000 Retained earnings 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 $ $ $ Equity method journal entries (price equals book value) Prepare journal entries for the transactions below relating to an Equity Investment accounted for using the equity method. a. An investor purchases 14,400 common shares of an investee at $5 per share; the shares represent 25% ownership in the investee and the investor concludes that it can exert significant influence over the investee. b. The investee reports net income of $48,000. c. The investor receives a cash dividend of $1.50 per common share from the investee. d. The investor sells all 14,400 common shares of the investee for $72,300. General Journal Ref. Description Debit Credit a. b. C. d. Equity investment Consolidation entries at date of acquisition (purchase price greater than book value) A parent company exchanges 2,500 shares of its $1 par value common stock, with a market value of $10/share, for all of the shares owned by the subsidiary's shareholders, resulting in a $25,000 total purchase price. On the acquisition date, the subsidiary reported a book value of Stockholders' Equity of $18,750, comprised of $7,500 of Common Stock and $11,250 of Retained Earnings. An examination of the subsidiary's balance sheet revealed that book values were equal to fair values for all assets except fo PPE (net), which has a book value of $10,000 and a fair value of $16,250. a. Prepare the entry that the parent makes to record the investment. General Journal Description Debit Credit Common stock b. Prepare the [E] and [A] consolidation entries. Consolidation Worksheet Description [E] Common stock Debit Credit to eliminate the stockholders' equity of subsidiary on the acquisition date [A] to record the [A] assets purchased on the acquisition date 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 Goodwill 350,000 Indefinite $700,000 20 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 statement: Balance sheet: Sales $5,500,000 $1,205,000 Assets Cost of goods sold (3,960,000) (720,000) Cash $928,050 $314,200 Gross profit 1,540,000 485,000 Accounts receivable 1,403,000 278,400 Equity income 155,500 Inventory 2,134,000 357,600 Operating expenses (825,000) (312,000) Equity investment 1,612,800 Net income $870,500 $173,000 Property, plant and equipment (PPE), net 11,365,200 661,600 $17,443,050 $1,611,800 Statemen retained earnings: BOY retained earnings $3,711,800 $620,000 Liabilities and stockholders' equity Net income 870,500 173,000 Accounts payable $805,200 $114,400 Dividends (176,100) (25,200) Accrued liabilities 957,000 149,600 Ending retained earnings $4,406,200 $767,800 Long-term liabilities 7,000,000 400,000 Common stock 507,450 80,000 APIC 3,767,200 100,000 Retained earnings 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 $ $ $