Question

Consolidation at the end of the first year subsequent to date of acquisition—Cost method (purchase price equals book value)
Assume that the parent company acquires its subsidiary on January 1, 2016, by exchanging 31,500 shares of its $1 par value Common Stock, with a market value on the acquisition date of $50 per share, for all of the outstanding voting shares of the acquiree. You have been charged with preparing the consolidation of these two companies at the end of the first year.

On the acquisition date, all of the subsidiary’s assets and liabilities had fair values equaling their book values. Following are financial statements of the parent and its subsidiary for the year ended December 31, 2016.

	Parent	Subsidiary			Parent	Subsidiary
Income statement				Balance sheet
Sales	$3,330,000	$1,890,000		Assets
Cost of goods sold	(2,331,000)	(1,134,000)		Cash	$789,660	$486,990
Gross profit	999,000	756,000		Accounts receivable	426,240	438,480
Investment income	39,690	-		Inventory	646,020	563,220
Operating expenses	(632,700)	(491,400)		Equity investment	1,575,000	-
Net income	$405,990	$264,600		Property, plant & equipment	2,441,556	1,357,020
Statement of retained earnings					$5,878,476	$2,845,710
BOY retained earnings	2,116,800	976,500		Liabilities and stockholders' equity
Net income	405,990	264,600		Accounts payable	$243,756	$180,180
Dividends	(126,180)	(39,690)		Accrued liabilities	289,710	235,620
Ending retained earnings	$2,396,610	$1,201,410		Long-term liabilities	-	630,000
				Common stock	466,200	126,000
				APIC	2,482,200	472,500
				Retained earnings	2,396,610	1,201,410
					$5,878,476	$2,845,710

a. Prepare the journal entry to record the acquisition of the subsidiary.

General Journal
Description	Debit	Credit
APICDividendsEquity investmentInvestment incomeNo entryRetained earnings
Common stock
APICDividendsEquity investmentInvestment incomeNo entryRetained earnings

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

If no consolidation entry is necessary for a particular step (i.e. ADJ, C, or E), select "No entry" as your answers for the journal descriptions.

Consolidation Journal
	Description	Debit	Credit
[ADJ]	APICDividendsEquity investmentInvestment incomeNo entryRetained earnings
	APICDividendsEquity investmentInvestment incomeNo entryRetained earnings
[C]	APICDividendsEquity investmentInvestment incomeNo entryRetained earnings
	APICDividendsEquity investmentInvestment incomeNo entryRetained earnings
[E]	Common stock
	APIC
	APICDividendsEquity investmentInvestment incomeNo entryRetained earnings
	APICDividendsEquity investmentInvestment incomeNo entryRetained earnings

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

Hint: Some eliminating entries may not be necessary. If so, leave them blank.

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	$3,330,000	$1,890,000
Cost of goods sold	(2,331,000)	(1,134,000)
Gross profit	999,000	756,000
Investment income	39,690	-		[C]
Operating expenses	(632,700)	(491,400)
Net income	$405,990	$264,600
Statement of retained earnings
BOY retained earnings	$2,116,800	$976,500		[E]			[ADJ]
Net income	405,990	264,600
Dividends	(126,180)	(39,690)					[C]
Ending retained earnings	$2,396,610	$1,201,410
Balance sheet
Assets
Cash	$789,660	$486,990
Accounts receivable	426,240	438,480
Inventory	646,020	563,220
Equity investment	1,575,000	-		[ADJ]			[E]
PPE, net	2,441,556	1,357,020
	$5,878,476	$2,845,710
Liabilities and equity
Accounts payable	$243,756	$180,180
Accrued liabilities	289,710	235,620
Long-term liabilities	-	630,000
Common stock	466,200	126,000		[E]
APIC	2,482,200	472,500		[E]
Retained earnings	2,396,610	1,201,410			-	-
	$5,878,476	$2,845,710

Answer 1

a.
Journal entry to record the acquisition of subsidiary
Account Title and Explanation	Debit	Credit
Investment in subsidiary	1,575,000
Common stock		31,500
APIC		1,543,500
(to record the acquisition of subsidiary in exchange of 31,500 common stock
shares of $ 1 par value and market value of $ 50 per share)
b.
Consolidation journal entries
Account Title and Explanation	Debit	Credit
Common stock	126,000
APIC	472,500
Retained earnings	976,500
Equity investment		1,575,000
(to eliminate the equity investment account of the holding company and the
common stock,APIC and retained earnings of the subsidiary company for
the purpose of consolidation of accounts)
Dividends	39,690
Investment income		39,690
(to eliminate the inter company transaction for dividend income of the holding
company and dividend expense of the subsidiary company for the purpose of
consolidation)
Note-
Under the cost method of consolidation,the equity investment made by the holding company stays on the balance
sheet at its original cost.Dividend income received on the investments are treated as revenue and not added to the
value of investment.
c.
Consolidated Spreadsheet for the year ended December 31,2016
Income Statement	Parent	Subsidiary	Debit	Credit	Consolidated
Sales	3,330,000	1,890,000			5,220,000
Cost of goods sold	(2,331,000)	(1,134,000)			(3,465,000)
Gross profit	999,000	756,000	-	-	1,755,000
Investment income	39,690	-	39,690		-
Operating expenses	(632,700)	(491,400)			(1,124,100)
Net income	405,990	264,600	39,690	-	630,900
Statement of retained earnings	Parent	Subsidiary	Debit	Credit	Consolidated
BOY retained earnings	2,116,800	976,500	976,500		2,116,800
Net income	405,990	264,600	39,690		630,900
Dividends	(126,180)	(39,690)		39,690	(126,180)
Ending retained earnings	2,396,610	1,201,410	1,016,190	39,690	2,621,520
Balance sheet	Parent	Subsidiary	Debit	Credit	Consolidated
Assets
Cash	789,660	486,990			1,276,650
Accounts receivable	426,240	438,480			864,720
Inventory	646,020	563,220			1,209,240
Equity investment	1,575,000			1,575,000	-
PPE,net	2,441,556	1,357,020			3,798,576
Total assets	5,878,476	2,845,710	-	1,575,000	7,149,186
Liabilities and equity					-
Accounts payable	243,756	180,180			423,936
Accrued liabilities	289,710	235,620			525,330
Long-term liabilities	-	630,000			630,000
Common stock	466,200	126,000	126,000		466,200
APIC	2,482,200	472,500	472,500		2,482,200
Retained earnings	2,396,610	1,201,410	976,500		2,621,520
Total Liabilities and equity	5,878,476	2,845,710	1,575,000	-	7,149,186
Note-
The original cost of equity investment made in the subsidiary was as under:
Common stock of subsidiary	126,000
APIC of subsidiary	472,500
Retained earnings of subsidiary ( as on Jan 1,2016)	976,500
Total equity investment	1,575,000
At the time of consolidation,the abovementioned values would be eliminated from the books of the subsidiary company
against the elimination of the equity investment from the books of the holding company)