Prepare consolidation spreadsheet for intercompany sale of equipment-Cost method Assume that a parent company acquired a subsidiary on January 1, 2012 for $922,000. The purchase price was $389,000 in excess of the book value of the subsidiary's Stockholders' Equity on the acquisition date. On the acquisition date, the subsidiary's stockholders equity was comprised of $390,000 of no-par common stock and $143,000 of retained earnings. The Acquisition Accounting Premium (AAP) was assigned as follows: an increase of $43,000 in accounts receivable that were entirely collected during the year after acquisition, an increase of $65,000 for property, plant and equipment that has 10 years of remaining useful life, $134,000 for an unrecorded patent with an 8-year remaining life and $147,000 for goodwill. All amortizable components of the AAP are amortized using the straight-line method. On January 1, 2014, the parent sold Equipment to the subsidiary for a cash price of $125,700. The parent had acquired the equipment at a cost of $121,800 and depreciated the equipment over its 12-year useful life using the straight-line method (no salvage value). The parent had depreciated the equipment for 2 years at the time of sale. The subsidiary retained the depreciation policy of the parent and depreciates the equipment over its remaining 10-year useful life. Following are financial statements of the parent and its subsidiary as of December 31, 2016. The parent uses the cost method of pre-consolidation investment bookkeeping. Parent Subsidiary Parent Subsidiary Income statement Balance sheet Sales $1,300,000 $598,000 Assets Cost of goods sold (715,000) (364,000) Cash $117,000 $78,000 Gross profit 585,000 234,000 Accounts receivable 156,000 117,000 Deprec. & amort. Expense (39,000) (26,000) Inventory Operating expenses (390,000) (104,000) Equity investment 364,000 182,000 922,000 Interest expense (19,500) Total expenses (448,500) (6,500) Property, plant & equipment (136,500) Other assets 442,000 312,000 169,000 286,000 Income (loss) from subsidiary 45,500 Total assets 2,170,000 $975,000 Net income $182,000 $97,500 Liabilities and stockholders' equity Accounts payable $325,000 $70,200 Statement of retained earnings Accrued liabilities BOY retained earnings $715,000 $325,000 Notes payable 32,500 195,000 59,800 78,000 Net income 182,000 Dividends (149,500) 97,500 Common stock (45,500) Retained earnings 870,000 390,000 747,500 377,000 Ending retained earnings $747,500 $377,000 Total liabilities and equity 2,170,000 $975,000 a. Prepare the journal entry that the parent made to record the sale of the equipment to the subsidiary, the journal entry that the subsidiary made to record the purchase, and the [I] entries for the year of sale. Parent General Journal Description Debit Cash 125,700 Credit 0 Accumulated depreciation 0 0 Gain on sale of equipment Equipment 0 24,200 0 101,500 To record sale of equipment Subsidiary General Journal Description Debit Credit Equipment 125,700 0 Cash 0 125,700 To record purchase of equipment. Consolidation Journal Description [Igain] Gain on sale of equipment Equipment Accumulated depreciation [Idep] Depreciation expense Debit Credit 24,200 0 24,200 20,300 0 0 0 0 20,300 b. Compute the remaining portion of the deferred gain at January 1, 2016. $ 3,900 c. Prior to preparing consolidated financial statements, compute the amount of equity income the parent would have reported for the year ended December 31, 2016 assuming the parent applied the equity method instead of the cost method of pre-consolidation bookkeeping. $942,500 d. Prior to preparing consolidated financial statements, compute the amount of Equity investment the parent would have reported on December 31, 2016 assuming the parent applied the equity method instead of the cost method of pre-consolidation bookkeeping. Do not use negative signs with your answers below. Equity Investment ("as if" Equity Method) Common Stock (S) @ EOY $ 0 Retained Earnings (S) @ EOY 0 Add: 0 Deduct: 0 EOY Investment ("as if" equity method) $ 0 e. Prepare the consolidation entries for the year ended December 31, 2016. Consolidation Journal Description Debit Credit [ADJ] 0 0 0 [C] 0 0 0 0 |[E] BOY Common stock (Subsidiary) 0 0 = 0 0 0 0 [A] PPE, net Patent 0 0 0 0 0 0 0 0 [D] 0 0 0 0 Patent 0 0 [Igain] 0 0 0 0 [Idep] 0 0 0 0 f. Prepare the consolidation spreadsheet for the year ended December 31, 2016. Use negative signs with your answers in the Consolidated column for: Cost of goods sold, all expenses (inc. Total expenses) and Dividends. Income statement Sales Cost of goods sold Consolidation Worksheet Parent Subsidiary Debit Credit $1,300,000 $598,000 (715,000) (364,000) Consolidated $ 0 0 Gross profit Deprec. & amort. expense Operating expenses Interest expense Total Expenses Income (loss) from subsidiary Net income (390,000) (104,000) (6,500) (19,500) (448,500) (136,500) 585,000 234,000 0 (39,000) (26,000) [D] 0 0 [Idep] 0 0 0 0 0 $ 0 45,500 $182,000 $97,500 [C] 0 Retained earnings statement: BOY retained earnings Net income Dividends $715,000 182,000 (149,500) (45,500) $325,000 [E] 97,500 0 0 [ADJ] $ 0 0 0 [C] 0 Ending retained earnings $747,500 $377,000 $ 0 Balance sheet: Assets Cash $117,000 $78,000 $ 0 Accounts receivable Inventory 156,000 117,000 364,000 182,000 0 0 Equity investment 922,000 [ADJ] 0 0 [E] 0 [Igain] 0 0 A [A] PPE, net 442,000 312,000 [A] 0 0 [D] 0 [Idep] 0 0 [Igain] Other assets 169,000 286,000 0 Patent [A] 0 0 [D] 0 Goodwill [A] 0 0 Total assets 2,170,000 $975,000 $ 0 Liabilities & stockholders' equity Accounts payable $325,000 $70,200 Accrued liabilities 32,500 59,800 Notes payable 195,000 78,000 Common stock EOY Retained earnings Total liabilities and equity 870,000 390,000 [E] 0 747,500 377,000 $2,170,000 $975,000 $ 0 $ $ 0 0 0 0 0 o 0 $ 0