Inferring consolidation entries from consolidated financial statementsCost method Assume a parent company acquired a subsidiary on January 1, 2015. The purchase price was $1,100,000 in excess of the subsidiarys 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	$340,000	17 years
Patent	360,000	12 years
Goodwill	400,000	Indefinitie
	$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:

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

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

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

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

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

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

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

c. 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 companys pre-consolidation net income of $1,700,000 to the consolidated balance of $1,810,000.

Do not use negative signs with your answers.

e. Why arent the Stockholders Equity accounts of the subsidiary reflected in the consolidated balance sheet?

a. The subsidiarys 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.

b. The subsidiarys 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.

c. The subsidiarys 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.

Parent Subsidiary Consolidated 9,150,000 (5,390,000) 3,760,000 $7,500,000 $1,650,000 (4,500,000) (890,000) 3,000,000 760,000 100,000 (1,400,000) (500,000) $1,700,000 $260,000 (1,950,000) $1,810,000 Income statement Sales Cost of goods sold Gross profit Investment income Operating expenses Net income Statement of retained earnings BOY retained earnings Net income Dividends Ending retained earnings Balance sheet Assets Cash Accounts receivable Inventory Equity investment Property, plant & equipment Patent list Goodwill 2,000,000 840,000 1,700,000 260,000 (200,000) (100,000) $3,500,000 $1,000,000 2,240,000 1,810,000 (200,000) $3,850,000 800,000 1,200,000 1,900,000 1,760,000 6,000,000 420,000 380,000 490,000 1,220,000 1,580,000 2,390,000 910,000 7,150,000 210,000 400,000 $12.950,000 $11,660,000 $2,200,000 Liabilities and stockholders' equity Accounts payable 900,000 150,000 1,050,000 Accrued liabilities Long-term liabilities Common stock APIC Retained earnings 1,340,000 240,000 4,000,000 550,000 720,000 110,000 1,200,000 150,000 3,500,000 1,000,000 $11,660,000 $2,200,000 1,580,000 4,550,000 720,000 1,200,000 3,850,000 $12.950,000 TA Parent Income (cost method) Deduct: 0% of subsidiary dividends Add: Deduc 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.) $ Consolidation Journal Description Debit Credit [AD] [C] [E] Common Stock APIC [A] PPE, net , Patent [D] Patent