Inferring consolidation entries from consolidated financial statements-Cost method Assume a parent company acquired a subsidiary on January 1, 2012. The purchase price was $1,312,000 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 $300,000 20 years Patent 432,000 12 years Goodwill 580,000 Indefinite $1,312,000 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, 2016, are as follows: Parent Subsidiary Consolidated Income statement Sales $9,075,000 $2,000,000 11,075,000 Cost of goods sold (6,534,000) (1,188,000) (7,722,000) Gross profit 2,541,000 812,000 3,353,000 Investment income 60,800 Operating expenses (1,361,280) (514,800) (1,927,080) Net income $1,240,520 $297,200 $1,425,920 Statement of retained earnings BOY retained earnings 6,328,440 1,043,000 6,594,440 Net income 1,240,520 297,200 1,425,920 Dividends (306,440) (60,800) (306,440) Ending retained earnings $7,262,520 $1,279,400 $7,713,920 Balance sheet Assets Cash 1,709,760 531,200 2,240,960 Accounts receivable 2,686,800 459,600 3,146,400 Inventory 3,520,200 589,800 4,110,000 Equity investment 2,182,000 Property, plant & equipment 12,752,640 1,091,400 14,069,040 Patent list 252,000 Goodwill 580,000 $22,851,400 $2,672,000 $24,398,400 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, 2016, are as follows: Parent Subsidiary Consolidated Income statement Sales $9,075,000 $2,000,000 11,075,000 Cost of goods sold (6,534,000) (1,188,000) (7,722,000) Gross profit 2,541,000 812,000 3,353,000 Investment income 60,800 Operating expenses (1,361,280) (514,800) (1,927,080) Net income $1,240,520 $297,200 $1,425,920 Statement of retained earnings BOY retained earnings 6,328,440 1,043,000 6,594,440 Net income 1,240,520 297,200 1,425,920 Dividends (306,440) (60,800) (306,440) Ending retained earnings $7,262,520 $1,279,400 $7,713,920 Balance sheet Assets Cash 1,709,760 531,200 2,240,960 Accounts receivable 2,686,800 459,600 3,146,400 Inventory 3,520,200 589,800 4,110,000 Equity investment 2,182,000 Property, plant & equipment 12,752,640 1,091,400 14,069,040 Patent list 252,000 Goodwill 580,000 $22,851,400 $2,672,000 $24,398,400 Liabilities and stockholders' equity Accounts payable 1,328,640 188,760 1,517,400 Accrued liabilities 1,578,840 246,840 1,825,680 Long-term liabilities 5,550,000 660,000 6,210,000 Common stock 845,520 132,000 845,520 APIC 6,285,880 165,000 6,285,880 Retained earnings 7,262,520 1,279,400 7,713,920 $22,851,400 $2,672,000 $24,398,400 a. For the year ended December 31, 2016, explain how the parent's pre-consolidation investment income of $60,800 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, 2016 pre-consolidation Equity Investment balance of $2,182,000 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, 2016, reconcile the parent company's pre-consolidation net income of $1,240,520 to the consolidated balance of $1,425,920. Do not use negative signs with your answers. Parent Income (cost method) Deduct: p% of subsidiary dividends Add: Dedu 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.) 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 Investmen 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, 2016. Consolidation Journal Description Debit Credit [AD] [C] [E] Common Stock APIC [A] PPE, net Patent [D] Patent Inferring consolidation entries from consolidated financial statements-Cost method Assume a parent company acquired a subsidiary on January 1, 2012. The purchase price was $1,312,000 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 $300,000 20 years Patent 432,000 12 years Goodwill 580,000 Indefinite $1,312,000 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, 2016, are as follows: Parent Subsidiary Consolidated Income statement Sales $9,075,000 $2,000,000 11,075,000 Cost of goods sold (6,534,000) (1,188,000) (7,722,000) Gross profit 2,541,000 812,000 3,353,000 Investment income 60,800 Operating expenses (1,361,280) (514,800) (1,927,080) Net income $1,240,520 $297,200 $1,425,920 Statement of retained earnings BOY retained earnings 6,328,440 1,043,000 6,594,440 Net income 1,240,520 297,200 1,425,920 Dividends (306,440) (60,800) (306,440) Ending retained earnings $7,262,520 $1,279,400 $7,713,920 Balance sheet Assets Cash 1,709,760 531,200 2,240,960 Accounts receivable 2,686,800 459,600 3,146,400 Inventory 3,520,200 589,800 4,110,000 Equity investment 2,182,000 Property, plant & equipment 12,752,640 1,091,400 14,069,040 Patent list 252,000 Goodwill 580,000 $22,851,400 $2,672,000 $24,398,400 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, 2016, are as follows: Parent Subsidiary Consolidated Income statement Sales $9,075,000 $2,000,000 11,075,000 Cost of goods sold (6,534,000) (1,188,000) (7,722,000) Gross profit 2,541,000 812,000 3,353,000 Investment income 60,800 Operating expenses (1,361,280) (514,800) (1,927,080) Net income $1,240,520 $297,200 $1,425,920 Statement of retained earnings BOY retained earnings 6,328,440 1,043,000 6,594,440 Net income 1,240,520 297,200 1,425,920 Dividends (306,440) (60,800) (306,440) Ending retained earnings $7,262,520 $1,279,400 $7,713,920 Balance sheet Assets Cash 1,709,760 531,200 2,240,960 Accounts receivable 2,686,800 459,600 3,146,400 Inventory 3,520,200 589,800 4,110,000 Equity investment 2,182,000 Property, plant & equipment 12,752,640 1,091,400 14,069,040 Patent list 252,000 Goodwill 580,000 $22,851,400 $2,672,000 $24,398,400 Liabilities and stockholders' equity Accounts payable 1,328,640 188,760 1,517,400 Accrued liabilities 1,578,840 246,840 1,825,680 Long-term liabilities 5,550,000 660,000 6,210,000 Common stock 845,520 132,000 845,520 APIC 6,285,880 165,000 6,285,880 Retained earnings 7,262,520 1,279,400 7,713,920 $22,851,400 $2,672,000 $24,398,400 a. For the year ended December 31, 2016, explain how the parent's pre-consolidation investment income of $60,800 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, 2016 pre-consolidation Equity Investment balance of $2,182,000 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, 2016, reconcile the parent company's pre-consolidation net income of $1,240,520 to the consolidated balance of $1,425,920. Do not use negative signs with your answers. Parent Income (cost method) Deduct: p% of subsidiary dividends Add: Dedu 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.) 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 Investmen 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, 2016. Consolidation Journal Description Debit Credit [AD] [C] [E] Common Stock APIC [A] PPE, net Patent [D] Patent