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, 2016, for $560,000. On this date, the balances of the subsidiary's stockholders' equity accounts were Common Stock, $35,000, Additional Paid-in Capital, $38,500, and Retained Earnings, $136,500. 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 $140,000 10 years 70,000 8 years 56,000 84,000 $350,000 8 years Indefinite The Goodwill asset has been tested annually for impairment, and has not been found to be impaired. Assume 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 2018 and 2019: Inventory Gross Profit Remaining in Receivable Sales 2019 $42,000 2018 $28,000 Unsold Inventory (Payable) $5,600 $7,350 $19,600 $10,500 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, 2019, follow: Parent Subsidiary Parent Subsidiary Income statement Balance sheet Sales $3,045,000 $560,000 Assets Cost of goods sold (2,135,000) (336,000) Cash $455,000 $175,000 Gross profit 910,000 Operating expenses (581,000) 224,000 Accounts receivable (140,000) Inventory 392,000 595,000 126,000 175,000 Income (loss) from subsidiary 10,500 Equity investment 560,000 Net income $339,500 $84,000 Property, plant & equipment 2,800,000 294,000 Statement of retained earnings $4,802,000 $770,000 BOY retained earnings $1,400,000 $283,500 Liabilities and stockholders' equity Net income Dividends 339,500 (87,500) 84,000 Accounts payable (10,500) Other current liabilities $245,000 $70,000 Ending retained earnings $1,652,000 $357,000 Long-term liabilities Common stock APIC 280,000 87,500 1,750,000 182,000 490,000 35,000 385,000 38,500 Retained earnings 1,652,000 357,000 $4,802,000 $770,000 a. Disaggregate and document the activity for the 100% Acquisition Accounting Premium (AAP) through December 31, 2019. Year ended December 31, 100% AAP Amortization - Dr (Cr) 2016 2017 2018 2019 Property, plant and equipment (PPE), net $ 14,000 $ 14,000 $ 14,000 $ 14,000 Customer List 8,750 8,750 8,750 8,750 Royalty Agreement 7,000 7,000 7,000 7,000 Goodwill 0 0 0 0 Net amortization $ 29,750 $ 29,750 $ 29,750 $ 29,750 100% Unamortized AAP - Dr (Cr) Jan. 1 2016 December 31, 2016 2017 2018 2019 Property, plant and equipment (PPE), net $140,000 $ 126,000 $112,000 $ 98,000 $ 84,000 Customer List 70,000 61,250 52,500 43,750 35,000 Royalty Agreement 56,000 49,000 42,000 35,000 28,000 Goodwill Net unamortized 84,000 84,000 84,000 84,000 84,000 $350,000 $ 320,250 $ 290,500 $ 260,750 $ 230,000 b. Compute the amount of the beginning of year [AD]] adjustment necessary for the consolidation of the financial statements for the year ended December 31, 2019. Do not use negative signs with your answers below. Change in RE(S) thru BOY Cumulative AAP amort thru BOY BOY Upstream IIP ADJ Amount $ 0 89,250 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] 0 0 0 0 [E] BOY Common stock (Subsidiary) 0 0 BOY APIC (Subsidiary) 0 0 0 0 0 0 [A] PPE, net 0 0 Customer list Royalty Agreement 0 0 0 0 0 0 0 0 [D] 0 0 0 0 Customer List 0 0 Royalty Agreement 0 0 [Icogs] 0 0 0 0 To recognize prior year profit on intercompany sales. [Isales] 0 0 0 0 [Icogs] 0 0 0 To defer current period profit on intercompany sales. [payl 0 0 0 0 Consolidation Worksheet Consolidated Income statement Parent Subsidiary Sales $3,045,000 $560,000 [Isales] Cost of goods sold (2,135,000) (336,000) [Icogs] Debit Credit 0 $ 0 0 [Icogs] 0 [Isales] Gross profit 910,000 224,000 Equity income 10,500 [C] 0 Operating expenses (581,000) (140,000) [D] 0 Net income $339,500 $84,000 $ Statement of retained earnings BOY retained earnings Net income Dividends 0 $1,400,000 $283,500 [E] 0 0 [AD]] $ 339,500 84,000 (87,500) (10,500) 0 [C] O O $357,000 $ 0 Ending retained earnings $1,652,000 Balance sheet Assets Cash $455,000 $175,000 Accounts receivable Inventory 392,000 595,000 175,000 126,000 O [Ipayl $ 0 [Icogs] OO Equity investment 560,000 [ADJ] 0 0 [E] 0 [Icogs] 0 0 [A] PPE, net 2,800,000 294,000 [A] 0 0 [D] 0 Customer List [A] 0 0 [D] 0 Royalty Agreement [A] Goodwill [A] 00 0 [D] 0 $4,802,000 $770,000 $ 0 Liabilities and equity Accounts payable $245,000 570,000 (Ipayl 0 $ Other currentliabilities 280,000 87,500 Long-term liabilities 1,750,000 182,000 Common stock 490,000 35,000 [E] APIC 385,000 38,500 [E] 00 0000 Retained earnings 1,652,000 357,000 $4,802,000 $770,000 $ 0 $ 0 $