Prepare consolidation spreadsheet for continuous sale of inventory-Cost method A parent company acquired 100 percent of the stock of a subsidiary company on January 1, 2013, for $1,010,000. On this date, the balances of the subsidiary's stockholders' equity accounts were Common Stock, $50,000, Additional Paid-in Capital, $55,000, and Retained Earnings, $195,000. On the acquisition date, the excess was assigned to the following AAP assets: Property, plant & equipment Customer list Royalty agreement Goodwill Original Amount Original Useful Life 270,000 10 years 170,000 8 years 150,000 8 years 120,000 Indefinite The Goodwill asset has been tested annually for impairment, and has not been found to be impaired. Assume that the parent company sells inventory to its wholly owned subsidiary. The subsidiary, ultimately, sells the inventory to customers outside of the consolidated group. You have compiled the following data for the years ending 2015 and 2016: Inventory Gross Profit Remaining in Receivable Sales 2016 $44,000 2015 $64,000 Unsold Inventory $12,000 $14,500 (Payable) $32,000 $19,000 The inventory not remaining at the end of a given year is sold to unaffiliated entities outside of the consolidated group during the next year. The parent uses the cost method of pre-consolidation Equity Investment bookkeeping. The financial statements of the parent and its subsidiary for the year ended December 31, 2016, follow: Income statement Sales Cost of goods sold Gross profit Income (loss) from subsidiary Operating expenses Net income Parent Subsidiary Parent Subsidiary Balance sheet $4,350,000 $800,000 Assets (3,050,000) (480,000) Cash 1,300,000 $650,000 $320,000 15,000 (830,000) 320,000 Accounts receivable Inventory 560,000 180,000 (200,000) Equity investment 850,000 250,000 1,010,000 $485,000 $120,000 Property, plant & equipment 4,000,000 420,000 Statement of retained earnings $7,070,000 $1,170,000 BOY retained earnings $2,000,000 $475,000 Liabilities and stockholders' equity Net income 485,000 120,000 Accounts payable $350,000 $100,000 Dividends (125,000) (15,000) Other current liabilities Ending retained earnings $2,360,000 $580,000 Long-term liabilities 400,000 125,000 2,500,000 260,000 Common stock 700,000 50,000 APIC Retained earnings 760,000 55,000 2,360,000 580,000 $7,070,000 $1,170,000 a. Disaggregate and document the activity for the 100% Acquisition Accounting Premium (AAP) through December 31, 2016. 100% AAP Amortization - Dr (Cr) Year ended December 31, 2013 2014 2015 2016 Property, plant and equipment (PPE), net $ 0 $ 0 $ 0 $ 0 Customer List 0 0 0 0 Royalty Agreement 0 0 0 0 Goodwill 0 0 0 0 Net amortization $ 0 $ 0 $ 0 0 100% Unamortized AAP - Dr (Cr) Property, plant and equipment (PPE), net $ Customer List Royalty Agreement Goodwill Net unamortized Jan. 1 December 31, 2013 2013 2014 2015 2016 0 $ 0 $ 0 $ 0 $ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 $ 0 $ 0 $ 0 $ 0 $ 0 b. Compute the amount of the beginning of year [ADJ] adjustment necessary for the consolidation of the financial statements for the year ended December 31, 2016. Do not use negative signs with your answers below. Change in RE(S) thru BOY $ 0 Cumulative AAP amort thru BOY 0 BOY Upstream IIP ADJ Amount 0 0 c. Complete the consolidating entries according to the C-E-A-D-I sequence and complete the consolidation worksheet. Consolidation Journal Description Debit Credit [ADJ] Equity investment 0 0 BOY Retained earnings-Parent 0 0 [C] Income (loss) from subsidiary 0 0 Dividends 0 0 [E] BOY Common stock (Subsidiary) 0 0 BOY APIC (Subsidiary) 0 0 BOY Retained earnings-Parent 0 0 Equity investment 0 0 [A] PPE, net 0 0 Customer list 0 0 Royalty Agreement 0 0 Goodwill 0 0 Equity investment 0 0 [D] Operating expenses 0 0 PPE, net 0 0 Customer List Royalty Agreement [Icogs] Equity investment 0 0 0 0 0 0 Cost of goods sold 0 0 To recognize prior year profit on intercompany sales. [Isales] Sales 0 0 Inventory 0 0 [Icogs] Cost of goods sold 0 0 Inventory 0 0 To defer current period profit on intercompany sales. [Ipay] Accounts payable 0 Accounts receivable 0 0 0 Use negative signs with answers in the Consolidated column for Cost of goods sold, Operating expenses and Dividends. Consolidation Worksheet Debit Credit Consolidated 0 0 0 0 [Icogs] 0 0 [Isales] 0 0 0 $ 0 Income statement Sales Parent Subsidiary $4,350,000 $800,000 [Isales] Cost of goods sold (3,050,000) (480,000) [Icogs] Gross profit 1,300,000 320,000 Equity income Operating expenses 15,000 (830,000) (200,000) [C] 0 [D] 0 Net income $485,000 $120,000 Statement of retained earnings BOY retained earnings $2,000,000 Net income 485,000 $475,000 120,000 [E] 0 0 [ADJ] 0 0 Dividends (125,000) (15,000) 0 [C] 0 Ending retained earnings $2,360,000 $580,000 0 Balance sheet Assets Cash $650,000 $320,000 0 Accounts receivable 560,000 180,000 0 [Ipayl 0 Inventory 850,000 250,000 0 [Icogs] 0 Equity investment 1,010,000 [ADJ] 0 0 [E] 0 [Icogs] 0 0 [A] PPE, net Customer List Royalty Agreement 4,000,000 420,000 [A] 0 0 [D] 0 [A] 0 0 [D] 0 [A] 0 0 [D] 0 Goodwill [A] 0 0 $7,070,000 $1,170,000 $ 0 Liabilities and equity Accounts payable Other currentliabilities Long-term liabilities $350,000 $100,000 [Ipayl 400,000 125,000 0 $ 0 0 2,500,000 260,000 0 Common stock APIC 700,000 50,000 [E] 0 0 760,000 55,000 [E] 0 0 Retained earnings 2,360,000 580,000 0 $7,070,000 $1,170,000 $ 0 $ 0 $ 0