Prepare consolidation spreadsheet for continuous sale of inventoryCost method

A parent company acquired 100 percent of the stock of a subsidiary company on January 1, 2013, for $800,000. On this date, the balances of the subsidiarys 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:

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:

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:

a. Disaggregate and document the activity for the 100% Acquisition Accounting Premium (AAP) through December 31, 2016.

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.

c. Complete the consolidating entries according to the C-E-A-D-I sequence and complete the consolidation worksheet.

Use negative signs with answers in the Consolidated column for Cost of goods sold, Operating expenses and Dividends.

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10 years Property, plant & equipment Customer list Royalty agreement Goodwill Original Amount Original Useful Life 280,000 180,000 8 years 160,000 8 years 120,000 Indefinite Inventory Gross Profit Remaining in Receivable Sales Unsold Inventory (Payable) $38,000 $6,000 $26,000 $58,000 $8,500 $13,000 2016 2015 Parent Parent Subsidiary Income statement Sales Cost of goods sold Gross profit Income (loss) from subsidiary Operating expenses Net income Statement of retained earnings BOY retained earnings Net income Dividends Ending retained earnings $4,350,000 (3,050,000) 1,300,000 15,000 (830,000) $485,000 Subsidiary Balance sheet $800,000 Assets (480,000) Cash 320,000 Accounts receivable Inventory (200,000) Equity investment $120,000 Property, plant & equipment $650,000 $330,000 560,000 180,000 850,000 250,000 1,040,000 4,000,000 420,000 $7,100,000 $1,180,000 $2,000,000 485,000 (125,000) $2,360,000 $485,000 Liabilities and stockholders' equity 120,000 Accounts payable (15,000) Other current liabilities $590,000 Long-term liabilities Common stock APIC Retained earnings $350,000 $100,000 400,000 125,000 2,500,000 260,000 700,000 50,000 790,000 55,000 2,360,000 590,000 $7,100,000 $1,180,000 2016 $ 100% AAP Amortization - Dr (Cr) Property, plant and equipment (PPE), net $ Customer List Royalty Agreement Goodwill Net amortization $ Year ended December 31, 2014 2015 28,000 28,000 22,500 22,500 20,000 20,000 2013 28,000 22,500 20,000 28,000 22,500 20,000 0 0 0 0 70,500 70,500 70,500 70,500 $ 100% Unamortized AAP - Dr (Cr) Property, plant and equipment (PPE), net $ Customer List Royalty Agreement Goodwill Net unamortized $ Jan. 1 2013 280,000 180,000 160,000 120,000 740,000 2013 252,000 $ 157,500 140,000 12,000 x 561,500 x $ December 31, 2014 2015 2016 224,000 $ 196,000 $ 168,000 135,000 112,500 90,000 120,000 100,000 80,000 12,000 x 12,000 x 12,000 x 491,000 * $ 420,500 * $ 350,000 x $ Change in RE(S) thru BOY Cumulative AAP amort thru BOY BOY Upstream IIP ADJ Amount 290,000 211,500 8,500 70,000 Debit 70,000 > > Credit 0 70,000 0 > > 15,000 15,000 0 50,000 55,000 485,000 0 > 0 > > 0 590,000 0 > Consolidation Journal Description [AD]] Equity investment BOY Retained earnings-Parent [C] Income (loss) from subsidiary Dividends [E] BOY Common stock (Subsidiary) BOY APIC (Subsidiary) BOY Retained earnings-Subsidiary Equity investment [A] PPE, net Customer list Royalty Agreement Goodwill Equity investment [D] Operating expenses PPE, net Customer List Royalty Agreement [lcogs] Equity investment Cost of goods sold 0 0 > 196,000 112,500 100,000 12,000 x 0 70,500 0 0 F > > > 420,500 x 0 28,000 22,500 20,000 0 0 8,500 0 > > 8,500 0 38,000 38,000 0 6,000 0 0 To recognize prior year profit on intercompany sales. [Isales) Sales Cost of goods sold [lcogs] Cost of goods sold Inventory To defer current period profit on intercompany sales. [lpay] Accounts payable Accounts receivable > > 6,000 26,000 0 26,000 Debit Credit Income statement Sales Cost of goods sold Parent Subsidiary $4,350,000 $800,000 [Isales] (3,050,000) (480,000) [lcogs] 38,000 6,000 Consolidated $ 5,112,000 (3,544,500) X 8,500 [lcogs] 3,800 x [lsales] 320,000 0 X 0 [C] [D] 15,000 70,500 0 X (200,000) $120,000 $ OX Gross profit 1,300,000 Equity income 15,000 Operating expenses (830,000) Net income $485,000 Statement of retained earnings BOY retained earnings $2,000,000 Net income 485,000 Dividends (125,000) Ending retained earnings $2,360,000 [E] 485,000 70,000[AD] $ 0 X 0 X $485,000 120,000 (15,000) $590,000 15,000 [C] 0 X $ 0 X $ 0 X Balance sheet Assets Cash Accounts receivable Inventory Equity investment $650,000 560,000 850,000 1,040,000 $330,000 180,000 250,000 OX 0 X 0 4,000,000 26,000 [lpay] 6,000 [lcogs) 590,000[E] 420,500 X [A] 28,000 [D] 22,500 [D] 20,000 [D] 420,000 0 X [AD]] [lcogs] [A] [A] [A] [A] 70,000 8,500 196,000 112,500 100,000 12,000 x PPE, net Customer List Royalty Agreement Goodwill OX 0 X OX $7,100,000 $1,180,000 $ 0 X 26,000 $ 0 X 0 x Liabilities and equity Accounts payable Other currentliabilities Long-term liabilities Common stock APIC Retained earnings 0 x $350,000 $100,000 [lpay] 400,000 125,000 2,500,000 260,000 700,000 50,000 [E] 790,000 55,000 [E] 2,360,000 590,000 $7,100,000 $1,180,000 0 X 50,000 55,000 0 X 0X $ 1,244,500 $ 0 X $ 0 X