On January 1, 2016, ParentCo acquired a 100% of the voting stock of SubCo using 900,000 shares

of ParentCo Stock, valued at $25 per share. Professional fees connected to the acquisition were

$900,000 and costs of registering and issuing the new shares were $550,000, both paid in cash.

SubCo performs vehicle maintenance service for owners of auto, truck and bus fleets. SubCo's

balance sheet at acquisition date was as follow:

Cash

500,000

Account receivables

2,100,000

Inventory

6,400,000

Equipment

16,900,000

Total Assets

25,900,000

Current Liabilities

4,200,000

Long-term Liabilities

6,900,000

Common Stocks

2,000,000

Additional Paid in Capital

3,900,000

Retained Earnings

8,900,000

Total Liabilities and Equity

25,900,000

In reviewing SubCo's assets and liabilities at the acquisition date, ParentCo determined the

following:

On a discounted present value basis, the accounts receivables had a fair value of

$2,400,000, and the long-term liabilities have a fair value of $7,000,000 with maturity of

20 years.

The replacement cost of the inventory was $7,000,000.

The turnover of short-term assets and liabilities is less than one year.

The current replacement cost of the equipment was $18,000,000. The equipment had a

16-year remaining useful life.

SubCo had long-term service contracts with several large fleet owners. These contracts

have been profitable; the present value of expected profits over the remaining term (10

years) of the contracts is estimated at $1,200,000. These contracts meet the criteria for

recognition separately.

SubCo had a skilled and experience assembled workforce. ParentCo estimated that the

cost to hire and train replacements would be $960,000.

SubCo's trade name is well-known among fleet owners and is estimated to have a fair

value of $90,000. The estimated remaining life was 3 years.

3

Following are

selected accounts

for ParentCo and SubCo as of

December 31, 2020

(credit

balances indicated by parentheses).

Several assets and liabilities accounts have been omitted

.

Account

ParentCo

SubCo

Income Statement

Revenues

($6,500,000)

($7,230,000)

Cost of Service

$3,500,000

$3,150,000

Depreciation

$500,000

$1,500,000

Amortization

$350,000

Interest Expenses

$1,250,500

$400,000

Equity in SubCo's income

?

$0

Net Income

?

($2,180,000)

Statement of Retained Earnings

Retained earnings 1/1/2020

($14,700,000)

($12,985,000)

Net Income (above)

?

($2,180,000)

Dividend paid

$520,000

$275,000

Retained earnings 12/31/2020

?

($14,890,000)

Balance Sheet

Cash

$3,480,000

$710,000

Account Receivable

$1,520,000

$1,500,000

Part inventory

$2,900,000

$3,800,000

Equipment (net)

$9,000,000

$6,600,000

Building

$14,500,000

$5,000,000

Investment in SubCo

?

Total Assets

Current Liabilities

($5,600,000)

($1,500,000)

LT Liabilities

($2,950,000)

($5,150,000)

Common Stock

($4,150,000)

($2,000,000)

Additional paid in capital

($5,830,000)

($3,900,000)

Retained earnings 12/31/2020

?

($14,890,000)

Total liabilities and equities

4

SubCo reported the following figures for years preceding 2020:

2016

2017

2018

2019

2020

Net Income

$900,000

$1,560,000

$1,400,000

$1,300,000

$2,180,000

Dividend

$170,000

$220,000

$415,000

$270,000

$275,000

ParentCo uses the Equity method to account for the investment account.

SubCo has not issued or repurchased stocks in the past 5 years.

Required

:

Prepare the ECOBV amortization schedule. How much is the ECOBV adjustment for

each of the five years? (5 points)

Fill in the missing values in the financials statements of ParentCo. (10 points)

Prepare Consolidation Worksheet for the selected accounts of ParentCo and SubCo (i.e.

consolidation adjustment entries and consolidated totals). (15 poin