1. Intercompany Transactions Equity Method 60 points

Parent purchased 100% of a Subsidiary on January 1, 2020. The excess of investment cost over book value of $350,000 was allocated entirely to a 7-year royalty agreement. The parent uses the equity method to account for its investment in its subsidiary.

In 2021, Subsidiary sold to Parent land having a book value of $90,000 for a total price of $244,000.

On January 2, 2022, Parent sold equipment to Subsidiary for $120,000. The equipment had a cost of $185,000 and accumulated depreciation of $40,000. The remaining life of the equipment was estimated at 8 years.

Subsidiary regularly sells merchandise to Parent. In 2021, inter-company sales amounted to $82,400, with $16,480 of deferred profit remaining in ending inventory. Year-end inter-company receivables/payables amounted to $16,000.

In 2022, inter-company sales amounted to $75,000 with $37,500 of deferred profit remaining in ending inventory. Year-end inter-company receivables/payables amounted to $28,000.

Financial statements of Parent and Subsidiary for the year ended December 31, 2022 are presented below.

	Parent	Subsidiary
Sales Revenue	$7,500,000	$2,450,000
Cost of Goods Sold	-5,930,000	-1,950,000
Gross Profit	1,570,000	500,000
Operating Expenses	-1,375,000	-286,000
Loss on sale of equipment	-25,000	0
Equity Income	164,855	0
Net Income	$334,855	$214,000
Retained Earnings, 1/1/22	$3,916,000	$1,750,000
Net income	334,855	214,000
Dividends	-85,000	-176,000
Retained Earnings, 12/31/22	$4,165,855	$1,788,000
Cash and receivables	$1,750,000	$1,145,600
Inventory	958,000	758,000
Equity Investment	2,397,875	0
Property, Plant & Equipment (Net)	4,562,980	1,116,590
Total Assets	$9,668,855	$3,020,190
Accounts payable	$980,000	$225,000
Accrued liabilities	142,800	376,500
Notes payable	1,010,200	51,190
Common stock	1,792,000	158,000
Additional paid-in capital	1,578,000	421,500
Retained Earnings, 12/31/22	4,165,855	1,788,000
Total Liabilities and Equities	$9,668,855	$3,020,190

a. Prepare the equity method journal entries recorded by the parent to account for its investment in Subsidiary during 2022.

b. Prepare confirm the Income (loss) from subsidiary on Parent's pre-consolidation books for 2022.

c. Prepare a schedule showing the computation of Equity Investment on Parent's pre-consolidation books at January 1 and December 31, 2022.

d. Prepare the consolidation entries for 2022.

e. Prepare a consolidating worksheet in excel.