: Intercompany Sale of Depreciable Assets

LO: 3

4. Parent acquired Subsidiary on January 1, 2014 at a price $150,000 in excess of book value. Of that excess, $100,000 was allocated to an unrecorded Customer List with a 10-year life, with the remainder to Goodwill.

On January 2017, Subsidiary sold equipment to Parent for $60,000. The equipment had a cost of $70,000 and accumulated depreciation of $28,000. The remaining life of the equipment was estimated at 6 years. Financial statements for the two companies for the year ended December 31, 2018 are presented below.

	Parent	Subsidiary
Sales revenue	$5,000,000	$ 1,000,000
Cost of goods sold	(3,600,000)	(600,000)
Gross profit	1,400,000	400,000
Operating expenses	(750,000)	(260,000)
Equity income	133,000	_
Net Income	$ 783,000	$ 140,000
Retained Earnings, 1/1/18	$2,922,150	$ 225,000
Net income	783,000	140,000
Dividends	(142,000)	(20,000)
Retained Earnings, 12/31/18	$3,563,150	$ 345,000
Cash and receivables	$1,404,650	$ 752,000
Inventory	1,300,000	550,000
Equity investment	712,000
Property, plant & equipment (Net)	5,030,000	1,030,000
Total Assets	$8,446,650	$2,332,000
Accounts payable	$ 676,000	$ 178,000
Accrued liabilities	716,000	230,000
Notes payable	1,250,000	1,300,000
Common stock	211,500	124,000
Additional paid-in capital	2,030,000	155,000
Retained Earnings, 12/31/18	3,563,150	345,000
Total Liabilities and Equities	$8,446,650	$2,332,000

Required:

a. Prepare the journal entries on the books of Parent and Subsidiary to record the equipment sale.

b. Compute the amount of unrealized gain at January 1, 2018.

c. Prepare entries required under the equity method on Parent's books for 2018.

d. Prepare the consolidation entries for 2018.