Question 3 Partially correct Mark 65.50 out of 132.00 Prepare consolidation spreadsheet for intercompany sale of equipment - Equity method Assume that a parent company acquired its subsidiary on January 1, 2009, at a purchase price that was $315,000 in excess of the book value of the subsidiary's Stockholders' Equity on the acquisition date. Of that excess, $215,000 was assigned to a Customer List that is being amortized over a 10- year period. The remaining $100,000 was assigned to Goodwill. In January of 2012, the wholly owned subsidiary sold Equipment to the parent for a cash price of $118,500. The subsidiary had acquired the equipment at a cost of $140,000 and depreciated the equipment over its 10-year useful life using the straight-line method (no salvage value). The subsidiary had depreciated the equipment for 4 years at the time of sale. The parent retained the depreciation policy of the subsidiary and depreciated the equipment over its remaining 6-year useful life. Financial statements of the parent and its subsidiary for the year ended December 31, 2013 follow in part f. below. The parent uses the equity method to account for its Equity Investment. The Customer List was amortized as part of the parent's equity method accounting. a. Prepare the journal entry that the subsidiary made to record the sale of the equipment to the parent, the journal entry that the parent made to record the purchase, and the entries for the year of sale. Journal Entries Description Debit Credit Subsidiary: Cash 118,500 0 Accumulated depreciation 57,050 x 0 Gain on sale of equipment 0 35,550 X Property, plant & equipment 0 140,000 Parent: Property, pant & equipment 118,500 0 Cash 0 118,500 [lgain] Gain on sale of equipment 35,550 X 0 Property, plant & equipment 21,500 0 Accumulated depreciation 0 57,050 x [ldepr) Accumulated depreciation 5,750 0 Depreciation expense 0 5,750 b. Compute the remaining portion of the deferred gain on January 1, 2013. $ 29,800 x C. Show the computation to yield the $127,250 of Income (loss) from subsidiary reported by the parent for the year ended December 31, 2013. Note: Use a negative sign with an answer to indicate a reduction in the computation. Net income of subsidiary AAP Depreciation Deferred gain on intercompany sale Income (loss) from subsidiary 143,000 (21,500) 5,750 127,250 d. Compute the Equity Investment balance of $811,500 on December 31, 2013. Note: Use a negative sign with an answer to indicate a reduction in the computation. Common stock 124,000 APIC 155,000 EOY Retained earnings 348,000 EOY Unamortized AAP 190,250 X Gain on intercompany sale (5,750) X Equity investment 811,500 e. Prepare the consolidation entries for the year ended December 31, 2013. Debit 0 x 0 0 Credit 0 0 x 0 x 0 X OX 0 0 0 OX 0 Consolidation Worksheet Description [C] Income (loss) from subsidiary Dividends Equity investment [E] Common stock APIC Retained earnings Equity investment [A] Customer list Goodwill Equity investment [D] Operating expenses Customer list [lgain) Equity Investment Property, pant & equipment Accumulated depreciation [ldepr) Accumulated depreciation Depreciation expense OX 0 0 0 OX 0 X 0 0 0 X OX OX 0 0 0 0 X 0X 0 0 f. Prepare the consolidation spreadsheet for the year ended December 31, 2013. Use negative signs with answers in the Consolidated column for Cost of goods sold, Operating expenses and Dividends. Elimination Entries Income statement: Parent Sub Dr Cr Consolidated Sales $10,000,000 $1,003,000 $ 0 X Cost of goods sold (7,200,000) (600,000) 0X Gross profit 2,800,000 403,000 $ 0 X Income (loss) from subsidiary 127,250 [C] OX 0 Operating expenses (1,500,000) (260,000) [D] 0 x [ldepr] 0X Net income $1,427,250 $143,000 $ OX Statement of retained earnings: BOY retained earnings $5,814,300 $225,000 [E] 0X $ Ox Net income 1,427,250 143,000 0X Dividends (285,200) (20,000) 0 x [C] 0 X EOY retained earnings $6,956,350 $348,000 $ OX Balance sheet: 5 $ Assets Cash Accounts receivable Inventory PPE, net OX 0 x 0X OX 0 x [lgain) OX $1,058,100 $325,000 1,750,000 430,000 2,600,000 550,000 10,060,000 1,030,000 Ilgain] [ldepr) [A] [] 811,500 [lgain) OX 0X [D] 0 X Customer List Goodwill Equity investment 0X OX OX 0 X 0 0X [C] 0 X [E] 0X [A] $16,279,600 $2,335,000 $ OX $ OX Liabilities and stockholders' equity Accounts payable Other currentliabilities Long-term liabilities Common stock APIC Retained earnings 0X $1,010,000 $178,000 1,190,000 230,000 2,500,000 1,300,000 553,000 124,000 4,070,250 155,000 6,956,350 348,000 $16,279,600 $2,335,000 OX 0X [E] [E] OX 0X $ Ox $ $ 0 X Partially correct Marks for this submission: 65.50/132.00 Question 3 Partially correct Mark 65.50 out of 132.00 Prepare consolidation spreadsheet for intercompany sale of equipment - Equity method Assume that a parent company acquired its subsidiary on January 1, 2009, at a purchase price that was $315,000 in excess of the book value of the subsidiary's Stockholders' Equity on the acquisition date. Of that excess, $215,000 was assigned to a Customer List that is being amortized over a 10- year period. The remaining $100,000 was assigned to Goodwill. In January of 2012, the wholly owned subsidiary sold Equipment to the parent for a cash price of $118,500. The subsidiary had acquired the equipment at a cost of $140,000 and depreciated the equipment over its 10-year useful life using the straight-line method (no salvage value). The subsidiary had depreciated the equipment for 4 years at the time of sale. The parent retained the depreciation policy of the subsidiary and depreciated the equipment over its remaining 6-year useful life. Financial statements of the parent and its subsidiary for the year ended December 31, 2013 follow in part f. below. The parent uses the equity method to account for its Equity Investment. The Customer List was amortized as part of the parent's equity method accounting. a. Prepare the journal entry that the subsidiary made to record the sale of the equipment to the parent, the journal entry that the parent made to record the purchase, and the entries for the year of sale. Journal Entries Description Debit Credit Subsidiary: Cash 118,500 0 Accumulated depreciation 57,050 x 0 Gain on sale of equipment 0 35,550 X Property, plant & equipment 0 140,000 Parent: Property, pant & equipment 118,500 0 Cash 0 118,500 [lgain] Gain on sale of equipment 35,550 X 0 Property, plant & equipment 21,500 0 Accumulated depreciation 0 57,050 x [ldepr) Accumulated depreciation 5,750 0 Depreciation expense 0 5,750 b. Compute the remaining portion of the deferred gain on January 1, 2013. $ 29,800 x C. Show the computation to yield the $127,250 of Income (loss) from subsidiary reported by the parent for the year ended December 31, 2013. Note: Use a negative sign with an answer to indicate a reduction in the computation. Net income of subsidiary AAP Depreciation Deferred gain on intercompany sale Income (loss) from subsidiary 143,000 (21,500) 5,750 127,250 d. Compute the Equity Investment balance of $811,500 on December 31, 2013. Note: Use a negative sign with an answer to indicate a reduction in the computation. Common stock 124,000 APIC 155,000 EOY Retained earnings 348,000 EOY Unamortized AAP 190,250 X Gain on intercompany sale (5,750) X Equity investment 811,500 e. Prepare the consolidation entries for the year ended December 31, 2013. Debit 0 x 0 0 Credit 0 0 x 0 x 0 X OX 0 0 0 OX 0 Consolidation Worksheet Description [C] Income (loss) from subsidiary Dividends Equity investment [E] Common stock APIC Retained earnings Equity investment [A] Customer list Goodwill Equity investment [D] Operating expenses Customer list [lgain) Equity Investment Property, pant & equipment Accumulated depreciation [ldepr) Accumulated depreciation Depreciation expense OX 0 0 0 OX 0 X 0 0 0 X OX OX 0 0 0 0 X 0X 0 0 f. Prepare the consolidation spreadsheet for the year ended December 31, 2013. Use negative signs with answers in the Consolidated column for Cost of goods sold, Operating expenses and Dividends. Elimination Entries Income statement: Parent Sub Dr Cr Consolidated Sales $10,000,000 $1,003,000 $ 0 X Cost of goods sold (7,200,000) (600,000) 0X Gross profit 2,800,000 403,000 $ 0 X Income (loss) from subsidiary 127,250 [C] OX 0 Operating expenses (1,500,000) (260,000) [D] 0 x [ldepr] 0X Net income $1,427,250 $143,000 $ OX Statement of retained earnings: BOY retained earnings $5,814,300 $225,000 [E] 0X $ Ox Net income 1,427,250 143,000 0X Dividends (285,200) (20,000) 0 x [C] 0 X EOY retained earnings $6,956,350 $348,000 $ OX Balance sheet: 5 $ Assets Cash Accounts receivable Inventory PPE, net OX 0 x 0X OX 0 x [lgain) OX $1,058,100 $325,000 1,750,000 430,000 2,600,000 550,000 10,060,000 1,030,000 Ilgain] [ldepr) [A] [] 811,500 [lgain) OX 0X [D] 0 X Customer List Goodwill Equity investment 0X OX OX 0 X 0 0X [C] 0 X [E] 0X [A] $16,279,600 $2,335,000 $ OX $ OX Liabilities and stockholders' equity Accounts payable Other currentliabilities Long-term liabilities Common stock APIC Retained earnings 0X $1,010,000 $178,000 1,190,000 230,000 2,500,000 1,300,000 553,000 124,000 4,070,250 155,000 6,956,350 348,000 $16,279,600 $2,335,000 OX 0X [E] [E] OX 0X $ Ox $ $ 0 X Partially correct Marks for this submission: 65.50/132.00