Question

Consolidation several years subsequent to date of acquisition—Equity method
Assume that a parent company acquired a subsidiary on January 1, 2014. The purchase price was $715,000 in excess of the subsidiary’s book value of Stockholders’ Equity on the acquisition date, and that excess was assigned to the following [A] assets:

[A] Asset								Original Amount			Original Useful Life
Property, plant and equipment (PPE), net								$140,000			16	years
Patent								245,000			7	years
License								105,000			10	years
Goodwill								225,000			Indefinite
								$715,000

The [A] assets with definite useful lives have been depreciated or amortized as part of the parent’s preconsolidation equity method accounting. The Goodwill asset has been tested annually for impairment, and has not been found to be impaired. The financial statements of the parent and its subsidiary for the year ended December 31, 2016, are as follows:

	Parent	Subsidiary			Parent	Subsidiary
Income statement				Balance sheet
Sales	$4,802,000	$1,318,300		Assets
Cost of goods sold	(3,457,300)	(784,700)		Cash	$719,600	$337,400
Gross profit	1,344,700	533,600		Accounts receivable	1,229,200	303,800
Equity income	139,150	-		Inventory	1,624,000	389,900
Operating expenses	(720,300)	(340,200)		Equity investment	1,580,550	-
Net income	$763,550	$193,400		Property, plant & equipment	2,923,200	721,000
Statement of retained earnings					$8,076,550	$1,752,100
BOY retained earnings	1,694,700	676,200		Liabilities and stockholders' equity
Net income	763,550	193,400		Accounts payable	$702,800	$124,600
Dividends	(374,000)	(38,000)		Accrued liabilities	835,800	163,100
Ending retained earnings	$2,084,250	$831,600		Long-term liabilities	2,100,000	436,100
				Common stock	527,100	87,500
				APIC	1,826,600	109,200
				Retained earnings	2,084,250	831,600
					$8,076,550	$1,752,100

a. Compute the Equity Investment balance as of January 1, 2016.

$Answer

b. Show the computation to yield the $139,150 equity income reported by the parent for the year ended December 31, 2016.

Do not use negative signs with your answers.

Subsidiary net income
Less: Amortization
Less: Depreciation

c. Show the computation to yield the $1,580,550 Equity Investment account balance reported by the parent at December 31, 2016.

Do not use negative signs with your answers.

Equity investment at 1/1/16
DividendsEquity incomeEquity investmentGoodwillOperating expensesPPE, netRetained earnings
DividendsEquity incomeEquity investmentGoodwillOperating expensesPPE, netRetained earnings
Equity investment at 12/31/16

d. Prepare the consolidation entries for the year ended December 31, 2016.

Consolidation Journal
	Description	Debit	Credit
[C]	DividendsEquity incomeEquity investmentGoodwillNet incomeOperating expensesPPE, netRetained earnings
	DividendsEquity incomeEquity investmentGoodwillNet incomeOperating expensesPPE, netRetained earnings
	Equity investment
[E]	Common Stock
	APIC
	DividendsEquity incomeEquity investmentGoodwillNet incomeOperating expensesPPE, netRetained earnings
	DividendsEquity incomeEquity investmentGoodwillNet incomeOperating expensesPPE, netRetained earnings
[A]	PPE, net
	Patent
	Licenses
	DividendsEquity incomeEquity investmentGoodwillNet incomeOperating expensesPPE, netRetained earnings
	DividendsEquity incomeEquity investmentGoodwillNet incomeOperating expensesPPE, netRetained earnings
[D]	DividendsEquity incomeEquity investmentGoodwillNet incomeOperating expensesPPE, netRetained earnings
	DividendsEquity incomeEquity investmentGoodwillNet incomeOperating expensesPPE, netRetained earnings
	Patent
	Licenses

e. Prepare the consolidated spreadsheet for the year ended December 31, 2016.

Use negative signs with answers in the Consolidated column for Cost of goods sold, Operating expenses and Dividends.

Consolidation Worksheet
	Parent	Subsidiary			Debit	Credit		Consolidated
Income statement
Sales	$4,802,000	$1,318,300
Cost of goods sold	(3,457,300)	(784,700)
Gross profit	1,344,700	533,600
Equity income	139,150	-		[C]
Operating expenses	(720,300)	(340,200)		[D]
Net income	$763,550	$193,400
Statement of retained earnings
BOY retained earnings	$1,694,700	$676,200		[E]
Net income	763,550	193,400
Dividends	(374,000)	(38,000)					[C]
Ending retained earnings	$2,084,250	$831,600
Balance sheet
Assets
Cash	$719,600	$337,400
Accounts receivable	1,229,200	303,800
Inventory	1,624,000	389,900
Equity investment	1,580,550	-					[C]
							[E]
							[A]
PPE, net	2,923,200	721,000		[A]			[D]
Patent				[A]			[D]
Licenses				[A]			[D]
Goodwill	-	-		[A]
	$8,076,550	$1,752,100
Liabilities and equity
Accounts payable	$702,800	$124,600
Accrued liabilities	835,800	163,100
Long-term liabilities	2,100,000	436,100
Common stock	527,100	87,500		[E]
APIC	1,826,600	109,200		[E]
Retained earnings	2,084,250	831,600			-	-
	$8,076,550	$1,752,100

Answer 1

Dear Student,

As per the HomeworkLib policy, only the first four parts of the question should be ansered. Kindly take note of it.

Part A

Equity Investment balance as of January 1, 2016 = common Stock + APIC + retained earnings + excess of subsidiary’s book value = 87500+109200+676200+606500 = $1479400

Excess value is taken after adjusting two years amortization and depreciation expense

Part B

Subsidiary net income		193400
Less: amortization	45500
Less: depreciation	8750	54250
		$139150

Amortization = (245000/7)+(105000/10) = 45500

Depreciation = 140000/16 = 8750

Part C

Equity investment at 1/1/16		1479400
Plus: equity income	139150
Less: dividends	(38000)	101150
Equity investment at 12/31/16		$1580550

Part D

	Consolidation Journal
	Description	Debit	Credit
[C]	Equity income	139150
	Dividends
	Equity investment		38000
			101150
[E]	Common stock	87500
	APIC	109200
	Retained earnings	676200
	Equity investment		872900
[A]	PPE, net (140000-(8750*2))	122500
	Patent (245000-(35000*2))	175000
	Licenses (105000-(10500*2))	84000
	Goodwill	225000
	Equity investment		606500
[D]	Operating expenses	54250
	PPE, net		8750
	Patent		35000
	Licenses		10500