Question
Prepare consolidation spreadsheet for intercompany sale of equipmentCost method Assume that a parent company acquired a subsidiary on January 1, 2012 for $817,000. The purchase
Prepare consolidation spreadsheet for intercompany sale of equipmentCost method Assume that a parent company acquired a subsidiary on January 1, 2012 for $817,000. The purchase price was $284,000 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 $8,000 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, $99,000 for an unrecorded patent with an 8-year remaining life and $112,000 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 $127,200. The parent had acquired the equipment at a cost of $123,300 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 | 364,000 | 182,000 | ||||||||||||
Operating expenses | (390,000) | (104,000) | Equity investment | 817,000 | - | ||||||||||||
Interest expense | (19,500) | (6,500) | Property, plant & equipment | 442,000 | 312,000 | ||||||||||||
Total expenses | (448,500) | (136,500) | Other assets | 169,000 | 286,000 | ||||||||||||
Income (loss) from subsidiary | 45,500 | - | Total assets | 2,065,000 | $975,000 | ||||||||||||
Net income | $182,000 | $97,500 | Liabilities and stockholders' equity | ||||||||||||||
Accounts payable | $325,000 | $70,200 | |||||||||||||||
Statement of retained earnings | Accrued liabilities | 32,500 | 59,800 | ||||||||||||||
BOY retained earnings | $715,000 | $325,000 | Notes payable | 195,000 | 78,000 | ||||||||||||
Net income | 182,000 | 97,500 | Common stock | 765,000 | 390,000 | ||||||||||||
Dividends | (149,500) | (45,500) | Retained earnings | 747,500 | 377,000 | ||||||||||||
Ending retained earnings | $747,500 | $377,000 | Total liabilities and equity | 2,065,000 | $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.
b. Compute the remaining portion of the deferred gain at January 1, 2016.
$Answer
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.
$Answer
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 | Answer | |
Retained Earnings (S) @ EOY | Answer | |
Add: | AnswerUnamortized AAP @ EOYUnconfirmed gain @ EOY | Answer |
Deduct: | AnswerUnamortized AAP @ EOYUnconfirmed gain @ EOY | Answer |
EOY Investment ("as if" equity method) | Answer |
e. Prepare the consolidation entries for the year ended December 31, 2016.
Answer | Answer |
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.
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