Question
Prepare consolidation spreadsheet for intercompany sale of equipmentCost method-- Assume that a parent company acquired a subsidiary on January 1, 2012 for $862,000. The purchase
Prepare consolidation spreadsheet for intercompany sale of equipmentCost method-- Assume that a parent company acquired a subsidiary on January 1, 2012 for $862,000. The purchase price was $329,000 in excess of the book value of the subsidiarys Stockholders Equity on the acquisition date. On the acquisition date, the subsidiarys 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 $23,000 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, $114,000 for an unrecorded patent with an 8-year remaining life and $127,000 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 $131,700. The parent had acquired the equipment at a cost of $127,800 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.
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| Parent | Subsidiary |
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| Parent | Subsidiary | ||||
Income statement |
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| Balance sheet |
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Sales |
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| $1,300,000 | $598,000 |
| Assets |
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Cost of goods sold |
| (715,000) | (364,000) |
| Cash |
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| $117,000 | $78,000 | ||||||
Gross profit |
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| 585,000 | 234,000 |
| Accounts receivable |
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| 156,000 | 117,000 | |||||||
Deprec. & amort. Expense | (39,000) | (26,000) |
| Inventory |
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| 364,000 | 182,000 | ||||||||
Operating expenses |
| (390,000) | (104,000) |
| Equity investment |
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| 862,000 | - | ||||||||
Interest expense |
| (19,500) | (6,500) |
| Property, plant & equipment |
| 442,000 | 312,000 | |||||||||
Total expenses |
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| (448,500) | (136,500) |
| Other assets |
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| 169,000 | 286,000 | ||||||
Income (loss) from subsidiary | 45,500 | - |
| Total assets |
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| 2,110,000 | $975,000 | ||||||||
Net income |
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| $182,000 | $97,500 |
| Liabilities and stockholders' equity |
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| Accounts payable |
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| $325,000 | $70,200 | ||||
Statement of retained earnings |
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| Accrued liabilities |
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| 32,500 | 59,800 | ||||||||
BOY retained earnings |
| $715,000 | $325,000 |
| Notes payable |
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| 195,000 | 78,000 | |||||||
Net income |
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| 182,000 | 97,500 |
| Common stock |
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| 810,000 | 390,000 | ||||||
Dividends |
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| (149,500) | (45,500) |
| Retained earnings |
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| 747,500 | 377,000 | |||||||
Ending retained earnings | $747,500 | $377,000 |
| Total liabilities and equity |
| 2,110,000 | $975,000 |
a) Prepare the consolidation entries for the year ended December 31, 2016.
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