LO2 49. Determining ending balances of accounts on the consolidated balance sheet at the end of the first year-Equity method Assume the parent company acquires its subsidiary on January 1, 2019, by exchanging 47,500 shares of its $1 par value Common Stock, with a market value on the acquisition date of $60 per share, for all of the outstanding voting shares of the acquiree. On the acquisition date, all of the subsidiary's individual net assets had fair values that equaled their book values except for a building (included in PPE, net) that is undervalued by $320,000 (depreciation expense = $20,000 per year), an unrecorded License Agreement that has a fair value of $210,000 (amortization expense = $30,000 per year), and an unre- corded Customer List owned by the subsidiary that has a fair value of $280,000 (amortization expense = $35,000 per year). Any further discrepancy between the purchase price and the book value of the subsidiary's Stockholders' Equity is attributed to expected synergies to be realized by the consolidated company as a result of the acquisition. The financial statements of the parent and its subsidiary for the year ended December 31, 2019, are as follows: Parent Subsidiary Parent Subsidiary Income statement: Sales. Cost of goods sold Gross profit.. Equity income. Operating expenses Net income $2,000,000 (1,200,000) 800,000 $ $7,000,000 (4,515,000) 2,485,000 215,000 (1,500,000) $1,200,000 580,000 900,000 Balance sheet: Assets Cash Accounts receivable Inventory Equity investment. Property, plant and equipment (PPE), net... $ 520,000 450,000 530,000 1,400,000 3,020,000 (500,000) $ 300,000 5,000,000 1,500,000 $3,000,000 $10,900,000 Statement of retained earnings: Beginning retained earnings... $3,600,000 Net income 1,200,000 Dividends (200,000) Ending retained earnings. $4,600,000 $1,245,000 300,000 (45,000) $1,500,000 Liabilities and stockholders' equity Accounts payable. Accrued liabilities Long-term liabilities. Common stock APIC Retained earnings $ 165,000 220,000 560,000 $ 500,000 700,000 1,200,000 800,000 3,100,000 4,600,000 $10,900,000 200,000 355,000 1,500,000 $3,000,000 a. b. C. d. e. Prepare the journal entry to record the acquisition of the subsidiary. Show the computation to yield the equity income of $215,000 reported by the parent in its income statement during 2019. Show the computation to yield the Equity Investment balance of $3,020,000 reported by the parent on December 31, 2019. Show the computation to determine whether any portion of the purchase price should be assigned to the Goodwill asset on January 1, 2019. At what amounts will each of the following be reported in the consolidated financial statements for the year ended December 31, 2019? 1. Consolidated net income 2. Accounts receivable 3. Equity investment 4. Property, plant and equipment (PPE), net 5. Goodwill 6. Common stock 7. APIC 8. Retained earnings What intangible assets will be reported on the consolidated balance sheet and at what amounts? Why were they not previously reported in pre-acquisition financial statements of the parent or the subsidiary? f
