Inferring consolidation entries from consolidated financial statements$$Cost method

Assume a parent company acquired a subsidiary on January $1,2015.$ The purchase price was $$1,100,000$ in excess of the subsidiary$$s book value of Stockholders$$

Equity on the acquisition date, and that excess was assigned to the following $[$A$]$ assets:

$[$A$]$ Asset Original Amount

Original

Useful

Life

Property, plant and equipment $($PPE$),$ net $$340,00017$ years

Patent $360,00012$ years

Goodwill $400,000$ Indefinite

$$1,100,000$

The parent company uses the cost method of pre$-$consolidation Equity Investment bookkeeping. The Goodwill asset has been tested annually for impairment

and has not been found to be impaired. Selected accounts from the parent, subsidiary, and consolidated financial statements for the year ended December $31,$

$2019,$ are as follows:

Parent Subsidiary Consolidated

Income statement

Sales $$7,500,000$ $$1,650,0009,150,000$

Cost of goods sold $(4,500,000)(890,000)(5,390,000)$

Gross profit $3,000,000760,0003,760,000$

Investment income $100,000--$

Operating expenses $(1,400,000)(500,000)(1,950,000)$

Net income $$1,700,000$ $$260,000$ $$1,810,000$

Statement of retained earnings

BOY retained earnings $2,000,000840,0002,240,000$

Net income $1,700,000260,0001,810,000$

Dividends $(200,000)(100,000)(200,000)$

Ending retained earnings $$3,500,000$ $$1,000,000$ $$3,850,000$

Balance sheet

Assets

Cash $800,000420,0001,220,000$

Accounts receivable $1,200,000380,0001,580,000$

Inventory $1,900,000490,0002,390,000$

Equity investment $1,760,000--$

Property, plant & equipment, net $6,000,000910,0007,150,000$

Patent list $210,000$

Goodwill $--400,000$

$$11,660,000$ $$2,200,000$ $$12,950,000$

Liabilities and stockholders' equity $--$

Accounts payable $900,000150,0001,050,000$

Accrued liabilities $1,340,000240,0001,580,000$

Long$-$term liabilities $4,000,000550,0004,550,000$

Common stock $720,000110,000720,000$

APIC $1,200,000150,0001,200,000$

Retained earnings $3,500,0001,000,0003,850,000$

$$11,660,000$ $$2,200,000$ $$12,950,000$

a$.$ For the year ended December $31,2019,$ explain how the parent$$s pre$-$consolidation investment income of $$100,000$ was determined.

Under the cost method, investment income equals the dividends received from the subsidiary.$$

Under the cost method, investment income equals equity income minus dividends received from the subsidiary.

Under the cost method, investment income equals equity income plus dividends received from the subsidiary.

b$.$ Explain how the parent$$s December $31,2019$ pre$-$consolidation Equity Investment balance of $$1,760,000$ was determined.

Under the cost method, it is the original purchase price plus dividends received by the subsidiary since acquisition.

Under the cost method, it is the original purchase price for the subsidiary.$$

Under the cost method, it is the original purchase price plus equity income and minus dividends received by the subsidiary since acquisition.

c$.$ For the year ended December $31,2019,$ reconcile the parent company$$s pre$-$consolidation net income of $$1,700,000$ to the consolidated balance of $$1,810,000.$

Do not use negative signs with your answers.

$2/2$

Parent Income $($cost method$)$

Deduct: p$\%$ of subsidiary dividends $100,000$

$260,000$

$50,000$

Parent Income $($equity method$)$

d$.$ What was the subsidiary$$s retained earnings balance on the acquisition date? You should assume the Common Stock and APIC have not changed since the

acquisition date. $($Hint: You will need to use an account that does not change after the acquisition date.$)$

$ $400,000$

e$.$ Why aren$$t the Stockholders$$ Equity accounts of the subsidiary reflected in the consolidated balance sheet?

The subsidiary$$s stockholders$$ equity is not held by a party outside of the economic entity represented in the consolidated financial statements and, as a

result, should not be included in the consolidated stockholders$$ equity.

The subsidiary$$s stockholders$$ equity is held by a party outside of the economic entity represented in the consolidated financial statements and, as a result,

should not be included in the consolidated stockholders$$ equity.

The subsidiary$$s stockholders$$ equity is held by a party outside of the economic entity represented in the consolidated financial statements and, as a result, is

reflected in the Equity Investment account on the consolidated balance sheet rather than be included in the consolidated stockholders$$ equity.$$

f$.$ Provide the consolidation entries for the year ending December $31,2019.$

Consolidation Journal

Description Debit Credit

$[$ADJ$]210,0000$

$0210,000$

$[$C$]100,0000$

$0100,000$

$[$E$]$ Common Stock $110,0000$

APIC $150,0000$

$840,0000$

$01,100,000$

$[$A$]$ PPE, net $100,0000$

Patent $150,0000$

$400,0000$

$0650,000$

$[$D$]50,0000$

$020,000$

Patent $030,000$