Question

Prepare consolidation spreadsheet for intercompany sale of land - Equity Method

Assume a parent company acquired its subsidiary on January 1, 2017, at a purchase price that was $270,000 in excess of the book value of the subsidiary's Stockholders' Equity on the acquisition date. Of that excess, $180,000 was assigned to an unrecorded patent owned by the subsidiary that is being amortized over a 10 year period. The [A] Patent asset has been amortized as part of the parent's equity method accounting. The remaining $90,000 was assigned to Goodwill. In 2018, the wholly owned subsidiary sold Land to the parent for $108,000. The land was reported on the subsidiary's balance sheet for $72,000 on the date of sale. The parent uses the equity method to account for its Equity Investment. Following are financial statements of the parent and its subsidiary for the year ended December 31, 2019:

	PARENT	SUBSIDIARY
Income statement:
Sales	$2,700,000	$342,000
COGS	(1,890,000)	(198,000)
Gross Profit	810,000	144,000
Income (loss) from subsidiary	45,000	0
Operating Expenses	(513,000)	(81,000)
Net Income	$342,000	$63,000

	PARENT	SUBSIDIARY
Statement of retained earnings
Beginning retained earnings	$648,000	$177,300
Net Income	342,000	63,000
Dividends	(90,000)	(15,300)
Ending retained earnings	$900,000	$225,000

	PARENT	SUBSIDIARY
Balance sheet
Assets
Cash	$234,000	$108,000
A/R	342,000	72,000
Inventory	522,000	135,000
PPE, net	1,800,000	193,500
Equity Investment	477,000	0
	$3,375,000	$508,500
Liabilities and stockholders equity
A/P	$201,600	$45,000
Other current liabilities	248,400	54,000
Long term liabilities	1,350,000	112,500
Common stock	360,000	27,000
APIC	315,000	45,000
Retained earnings	900,000	225,000
	$3,375,000	$508,000

a. Show the computation to yield the $45,000 of Income (loss) from subsidiary reported by the parent for the year ended December 31, 2019.

b. Show the computation to yield the $477,000 Equity Investment account balance reported by the parent on December 31, 2019.  

c. Prepare the consolidation entries for the year ended December 31, 2019.

d. Prepare the consolidation spreadsheet for the year ended December 31, 2019.

Answer 1

Working

Particular	Original Amounnt	Original useful life	Amortization per year
	(A)	in years (B)	[A/B]
Patent	180000	10	18000
Goodwill	90000	Indefinite	-
		Year ended 31 dec
100% Amortization	2017	2018	2019
Patent	18000	18000	18000
Goodwill
Net amortization	18000	18000	18000
	Jan-01	Dec-31	Dec-31	Dec-31
	2017	2017	2018	2019
Patent	180000	162000	144000	126000
Goodwill	90000	90000	90000	90000
Net Unamortised	270000	252000	234000	216000

Computation of gain/loss
on sale of lans by subsidiary
2018
Transfer Price of Land	108000
Less : Book value	72000
Gain on Sale Of Land	36000

a)	Computation of Income (loss) from subsidiary
	Net Income Of subsidiary	63000
	less : Depreciation	(18000)
	Income (loss) from subsidiary	45000

b)	Computation of equity investment
	Common stock	27000
	APIC	45000
	BOY retained earning	177300
	BOY unamortised AAP	234000
	Gain on intercompany sale of land	(36000)
	Income (loss) from subsidiary	45000
	Dividends	(15300)
	Equity Investments	477000

c)	Consolidation Entries
	For the year ended 31 dec 2019
	Particular	Debit	Credit
C	Income (loss) from subsidiary	45000
	To Dividends		15300
	To equity investments		29700
	( To record elimination of equity investment from
	the income (loss) and dividend from subsidiary
E	Common Stock	27000
	APIC	45000
	BOY retianed earnings	177300
	To equity investments		249300
	( To record elimination of equity investment from
	common stock, additional paid in capital &
	BOY retianed earnings )
A	Patent	144000
	Goodwill	90000
	To equity investments		234000
	( To record unamortised AAP assets as on 1/1/19
	by eliminating the equity investments )
	Operating expenses	18000
D	To patents		18000
	(To record the amortisation during the year on
	AAP assets )
GAIN)	Equity investment	36000
	To PPE net		36000
	( To recognise prior year profit on intercompany
	land sale )

d)

d)	Consolidation worksheet
	Parent	Subsidiary	Debit	Credit		Consolidated
Income statement
sales	2700000	342000					3042000
Cost of good sold	-1890000	-198000					-2088000
Gross profit	810000	144000					954000
Equity Income	45000		C	45000
Operating expenses	-513000	-81000	(D)	18000			612000
Net Income	342000	63000					342000
Statement of Retianed Earning
BOY retained earning	648000	177300	E	177300			648000
Net Income	342000	63000					342000
Dividends	-90000	-15300			15300		-90000
Ending retained earning	900000	225000					900000
Balance Sheet
Cash	234000	108000					342000
Accounts receivable	342000	72000					414000
Inventory	522000	135000					657000
PPE, net	1800000	193500			36000	Gain	1957500
Patent			A	144000	18000	D	126000
Goodwill			A	90000			90000
Equity Investemnt	477000		GAIN	36000	29700	C
					249300	E
					234000	A
	3375000	508000					3586500
Liabilities and equity
Account payable	201600	45000					246600
Other current liabilities	248400	54000					302400
Long term liabilities	1350000	112500					1462500
Common stock	360000	27000	E	27000			360000
APIC	315000	45000	E	45000			315000
Retained earning	900000	225000					900000
	3375000	508000					358650