1. On January 1, 2016, Parent Company acquired 100% of the common stock of Subsidiary Company for $365,000. On this date, Subsidiary had common stock, other paid in capital, and retained earnings of $50,000, $100,000, and $200,000 respectively. Any excess of cost over book value is due to goodwill. Parent uses the simple equity method to account for its investment in subsidiary.

On January 1, 2017, Parent purchased equipment for $174,120 and immediately leased the equipment to Subsidiary on a 4-year lease. The transaction was legally structured as a sales-type lease with a present value for the minimum lease payments of $204,120. Parent recorded the following entry:

Minimum Lease Payments Receivable	240,000
Unearned Interest Income		35,880
Equipment		174,120
Sales Profit on Lease		30,000

The minimum lease payments of $60,000 are to be made annually on January 1, beginning immediately, for a total of 4 payments. The implicit interest rate is 12%. The lease provides for an automatic transfer of title at the end of 4 years. The estimated useful life of the equipment is 6 years. The lease has been capitalized by both companies.

A lease amortization schedule, applicable to either company, is presented below:

Carrying	Carrying	Interest			Principal
Value on	Value	Rate	Interest	Payment	Reduction
1-1-17	$204,120
	- 60,000
1-1-17	144,120	12%	$17,294	$60,000	$42,706
	- 42,706
1-1-16	101,414	12%	12,170	60,000	47,830
	- 47,830
1-1-19	53,584	12%	6,416*	60,000	53,584
	- 53,584
1-1-21	$ 0	*Adjusted for rounding error.

Required:

Prepare the eliminations and adjustments required by the intercompany lease on the partial worksheet as of December 31, 2017. Key and explain all eliminations and adjustments. (No actual journal entries required.)

	Trial Balance		Eliminations and
	Parent	Sub.	Adjustments
Account Titles	Company	Company	Debit		Credit
Min. Lease Payments Rec.	180,000
Unearned Interest Income	(18,586)
Buildings and Equipment	350,000	300,000
Accumulated Depreciation	(100,000)	(50,000)
Equipment under Cap. Lease		204,120
Acc. Depr. - Eq. Cap. Lease		(34,020)
Obligation under Cap. Lease		(144,120)
Interest Payable on Lease		(17,294)
Operating & Other Expenses	120,000	42,706
Interest Income on Lease	(17,294)
Interest Expense on Lease		17,294
Sales Profit on Lease	(30,000)