Inferring consolidation entries from consolidated financial statements-Cost method Assume a parent company acquired a subsidiary on January 1, 2012. The purchase price was $1,242,000 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 20 years Patent 432,000 12 years Goodwill 510,000 Indefinite $1,242,000 $300,000 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 $1,980,000 11,055,000 Cost of goods sold (6,534,000) (1,188,000) (7,722,000) Gross profit 2,541,000 792,000 3,333,000 Investment income 40,800 Operating expenses (1,361,280) (514,800) (1.927,080) Net income $1,220,520 $277,200 $1,405,920 Statement of retained earnings BOY retained earnings 6,328,440 1,023,000 6,574,440 Net income 1,220,520 277,200 1,405.920 Dividends 1286,440) (40,800) (286,440) Ending retained earnings $7,262,520 $1,259,400 $7,693,920 Balance sheet Assets Cash 1,709,760 511,200 2,220,960 Accounts receivable 2,686,800 459,600 3,146,400 Inventory 3,520,200 589,800 4,110,000 Equity investment 2,112,000 Parent Subsidiary Consolidated Income statement Sales 11,055,000 (7,722,000) 3,333,000 Cost of goods sold Gross profit Investment income Operating expenses Net income Statement of retained earnings BOY retained earnings Net income Dividends $9,075,000 $1,980,000 (6,534,000) (1,188,000) 2,541,000 792,000 40,800 (1,361,280) (514,800) $1,220,520 $277,200 (1,927,080) $1,405,920 6,328,440 1,023,000 1,220,520 277,200 (286,440) (40,800) $7,262,520 $1,259,400 6,574,440 1,405,920 (286,440) $7,693,920 Ending retained earnings Balance sheet Assets Cash 2,220,960 511,200 459,600 Accounts receivable 1,709,760 2,686,800 3,520,200 2,112,000 12,752,640 3,146,400 4,110,000 Inventory Equity investment Property, plant & equipment Patent list 589,800 1,091,400 14,069,040 252,000 510,000 Goodwill $22,781,400 $2,652,000 $22,308,400 Liabilities and stockholders' equity Accounts payable Accrued liabilities Long-term liabilities Common stock 1,328,640 188,760 1,578,840 246,840 5,550,000 660,000 845,520 132,000 6,215,880 165,000 7,262,520 1,259,400 $22,781,400 $2,652,000 1,517,400 1,825,680 6,210,000 845,520 6,215,880 7,693,920 $24,308,400 APIC Retained earnings a. For the year ended December 31, 2016, explain how the parent's pre-consolidation investment income of $40,800 was determined. Ounder the cost method, investment income equals the dividends received from the subsidiary. Ounder the cost method, investment income equals equity income minus dividends received from the subsidiary. OUnder 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 $2,112,000 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. Ounder 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 $1,220,520 to the consolidated balance of $1,405,920. Do not use negative signs with your answers, Parent Income (cost method) Deduct:p% of subsidiary dividends $ 0 0 Add: 0 0 Dedux Parent Income (equity method) $ 0 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.) SO 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, OThe 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, 2016. Consolidation Journal Description Debit Credit (ADJI a 0 0 . 0 [C] 0 0 [E] a Common Stock APIC 0 0 0 Oo oo ooo 0 a [A] 0 PPE.net Patent 0 0 0 0 [D] 0 0 0 + 0 Patent 0 a Check