Question
On January 1, 2016, Parent Company purchased 80% of the common stock of Subsidiary Company for $316,000. On this date, Subsidiary had common stock, other
On January 1, 2016, Parent Company purchased 80% of the common stock of Subsidiary Company for $316,000. On this date, Subsidiary had common stock, other paid-in capital, and retained earnings of $40,000, $120,000, and $190,000, respectively. Net income and dividends for 2 years for Subsidiary Company were as follows:
2016 2017
Net income $50,000 $90,000
Dividends 10,000 20,000
On January 1, 2016, the only tangible assets of Subsidiary that were undervalued were inventory and building. Inventory, for which FIFO is used, was worth $5,000 more than cost. The inventory was sold in 2016. Building, which was worth $15,000 more than book value, has a remaining life of 8 years, and straight-line depreciation is used. Any remaining excess is goodwill.
Prepare Parents 2016 and 2017 journal entries (after the purchase has been recorded) to record the transactions related to its investment in Subsidiary under the
a. cost method
b. simple equity method
c. sophisticated equity method
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