Inferring consolidation entries from consolidated financial statementsCost method Assume a parent company acquired a subsidiary on January 1, 2012. The purchase price was $1,292,000 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	$300,000	20 years
Patent	432,000	12 years
Goodwill	560,000	Indefinite
	$1,292,000

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	$1,990,000	11,065,000
Cost of goods sold	(6,534,000)	(1,188,000)	(7,722,000)
Gross profit	2,541,000	802,000	3,343,000
Investment income	50,800	-	-
Operating expenses	(1,361,280)	(514,800)	(1,927,080)
Net income	$1,230,520	$287,200	$1,415,920
Statement of retained earnings
BOY retained earnings	6,328,440	1,033,000	6,584,440
Net income	1,230,520	287,200	1,415,920
Dividends	(296,440)	(50,800)	(296,440)
Ending retained earnings	$7,262,520	$1,269,400	$7,703,920
Balance sheet
Assets
Cash	1,709,760	521,200	2,230,960
Accounts receivable	2,686,800	459,600	3,146,400
Inventory	3,520,200	589,800	4,110,000
Equity investment	2,162,000	-	-
Property, plant & equipment	12,752,640	1,091,400	14,069,040
Patent list			252,000
Goodwill	-	-	560,000
	$22,831,400	$2,662,000	$24,368,400
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	6,265,880	165,000	6,265,880
Retained earnings	7,262,520	1,269,400	7,703,920
	$22,831,400	$2,662,000	$24,368,400

a. For the year ended December 31, 2016, explain how the parents pre-consolidation investment income of $50,800 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 parents December 31, 2016 pre-consolidation Equity Investment balance of $2,162,000 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 companys pre-consolidation net income of $1,230,520 to the consolidated balance of $1,415,920.

Do not use negative signs with your answers.

Parent Income (cost method)	Answer
Deduct: p% of subsidiary dividends	Answer
Answerp% of subsidiary net incomep% of AAP amortization for year	Answer
Answerp% of subsidiary net incomep% of AAP amortization for year	Answer
Parent Income (equity method)	Answer

d. What was the subsidiarys retained earnings balance on the acquisition date? (Hint: You will need to use an account that does not change after the acquisition date.)

$Answer

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

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.

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.

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, 2016.

Consolidation Journal
	Description	Debit	Credit
[ADJ]	AnswerBOY Retained Earnings - ParentBOY Retained Earnings - SubsidiaryDividendsEquity investmentGoodwillInvestment incomeOperating expensesPPE, net	Answer	Answer
	AnswerBOY Retained Earnings - ParentBOY Retained Earnings - SubsidiaryDividendsEquity investmentGoodwillInvestment incomeOperating expensesPPE, net	Answer	Answer
[C]	AnswerBOY Retained Earnings - ParentBOY Retained Earnings - SubsidiaryDividendsEquity investmentGoodwillInvestment incomeOperating expensesPPE, net	Answer	Answer
	AnswerBOY Retained Earnings - ParentBOY Retained Earnings - SubsidiaryDividendsEquity investmentGoodwillInvestment incomeOperating expensesPPE, net	Answer	Answer
[E]	Common Stock	Answer	Answer
	APIC	Answer	Answer
	AnswerBOY Retained Earnings - ParentBOY Retained Earnings - SubsidiaryDividendsEquity investmentGoodwillInvestment incomeOperating expensesPPE, net	Answer	Answer
	AnswerBOY Retained Earnings - ParentBOY Retained Earnings - SubsidiaryDividendsEquity investmentGoodwillInvestment incomeOperating expensesPPE, net	Answer	Answer
[A]	PPE, net	Answer	Answer
	Patent	Answer	Answer
	AnswerBOY Retained Earnings - ParentBOY Retained Earnings - SubsidiaryDividendsEquity investmentGoodwillInvestment incomeOperating expensesPPE, net	Answer	Answer
	AnswerBOY Retained Earnings - ParentBOY Retained Earnings - SubsidiaryDividendsEquity investmentGoodwillInvestment incomeOperating expensesPPE, net	Answer	Answer
[D]	AnswerBOY Retained Earnings - ParentBOY Retained Earnings - SubsidiaryDividendsEquity investmentGoodwillInvestment incomeOperating expensesPPE, net	Answer	Answer
	AnswerBOY Retained Earnings - ParentBOY Retained Earnings - SubsidiaryDividendsEquity investmentGoodwillInvestment incomeOperating expensesPPE, net	Answer	Answer
	Patent	Answer	Answer