Prepare consolidation spreadsheet for intercompany sale of equipmentCost 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 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 $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.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.

Parent Subsidiary Parent Subsidiary Income statement Balance sheet Sales Cost of goods sold Gross profit Deprec. & amort. Expense Operating expenses Interest expense Total expenses Income (loss) from subsidiary $1,300,000 (715,000) 585,000 (39,000) (390,000) (19,500) (448,500) 45,500 $182,000 $598,000 Assets (364,000) Cash 234,000 Accounts receivable (26,000) Inventory (104,000) Equity investment (6,500) Property, plant & equipment (136,500) Other assets $78,000 117,000 182,000 $117,000 156,000 364,000 922,000 442,000 169,000 312,000 286,000 $975,000 Total assets 2,170,000 Net income Statement of retained earnings BOY retained earnings $715,000 Net income 182,000 Dividends (149,500) Ending retained earnings $747,500 $97,500 Liabilities and stockholders' equity Accounts payable Accrued liabilities $325,000 Notes payable 97,500 Common stock (45,500) Retained earnings $377,000 Total liabilities and equity $325,000 32,500 195,000 870,000 747,500 $70,200 59,800 78,000 390,000 377,000 $975,000 2,170,000 Parent Subsidiary Parent Subsidiary Income statement Balance sheet Sales Cost of goods sold Gross profit Deprec. & amort. Expense Operating expenses Interest expense Total expenses Income (loss) from subsidiary $1,300,000 (715,000) 585,000 (39,000) (390,000) (19,500) (448,500) 45,500 $182,000 $598,000 Assets (364,000) Cash 234,000 Accounts receivable (26,000) Inventory (104,000) Equity investment (6,500) Property, plant & equipment (136,500) Other assets $78,000 117,000 182,000 $117,000 156,000 364,000 922,000 442,000 169,000 312,000 286,000 $975,000 Total assets 2,170,000 Net income Statement of retained earnings BOY retained earnings $715,000 Net income 182,000 Dividends (149,500) Ending retained earnings $747,500 $97,500 Liabilities and stockholders' equity Accounts payable Accrued liabilities $325,000 Notes payable 97,500 Common stock (45,500) Retained earnings $377,000 Total liabilities and equity $325,000 32,500 195,000 870,000 747,500 $70,200 59,800 78,000 390,000 377,000 $975,000 2,170,000