Intercompany Transactions

Assume that a parent company acquired 100% of a subsidiary on 1/1/X1. The purchase price was $175,000 in excess of the subsidiarys book value of net assets on acquisition date and the excess was assigned entirely to an unrecorded patent. The life of the patent is 10 years. Assume the subsidiary sells inventory to the parent. The parent ultimately sells the inventory to outside customers. The following relates to the years X2 and X3:

	Inventory Sales	GP of unsold inventory	Receivable (Payable)
X3	$103,300	$29,441	$41,320
X2	$87,900	$19,137	$27,986

The financial statements for the parent and subsidiary for the year ended 12/31/X3 are attached in the Excel spreadsheet.

• Prepare the consolidated financial statements at 12/31/X3 by placing the appropriate entries in their respective debit/credit column cells.
• Indicate, in the blank column cell to the left of the debit and credit column cells if the entry is a [C], [E], [A], [D] or [I]entry.

Consolidation Entries Parent Subsidiary Dr Cr Consolidated Income Statement: Sales Cost of goods sold 8,220,000 1,549,500 (5,754,000) (929,700) Gross proft Equity income Operating expenses Net income 2,466,000 189,126 619,800 (1,561,800) (402,870 1,093,326 216,930 0 Statement of Retained Earnings BOY retained earnings Net income Dividends EOY retained earnings 4,129,728 1,093,326 216,930 (251,465) (28,201) 800,575 0 4,971,589 989,304 Balance Sheet: Assets Cash Accounts receivable Inventory Building, net Patent Equity investment 555,910 1,052,160359,484 1,594,680 461,751 7,670,904 854,291 500,842 0 1,314,788 12,188,442 2,176,368 Liabilities & stockholders' equity Accounts payable Other current liabilities Long-term liabilities Common stock APIC Retained earnings 0 615,678 758,475 3,500,000 184,948 253,191 516,500 0 1,343,970 103,300 129,125 4,971,589 989,304 2,176,368 998,730 12,188,442 0 0