Question

Consolidation several years subsequent to date of acquisition—Equity method
Assume a parent company acquired a subsidiary on January 1, 2017. The purchase price was $820,000 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								$240,000			12	years
Patent								240,000			8	years
License								160,000			10	years
Goodwill								180,000			Indefinite
								$820,000

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, 2019, are as follows:

	Parent	Subsidiary			Parent	Subsidiary
Income statement				Balance sheet
Sales	$4,800,000	$1,300,000		Assets
Cost of goods sold	(3,500,000)	(774,000)		Cash	$720,000	$330,000
Gross profit	1,300,000	526,000		Accounts receivable	1,130,000	280,000
Equity income	120,000	-		Inventory	1,450,000	500,000
Operating expenses	(720,000)	(340,000)		Equity investment	1,800,000	-
Net income	$700,000	$186,000		Property, plant & equipment, net	2,900,000	780,000
Statement of retained earnings					$8,000,000	$1,890,000
BOY retained earnings	1,600,000	680,000		Liabilities and stockholders' equity
Net income	700,000	186,000		Accounts payable	$760,000	$122,000
Dividends	(360,000)	(36,000)		Accrued liabilities	840,000	160,000
Ending retained earnings	$1,940,000	$830,000		Long-term liabilities	2,150,000	430,000
				Common stock	610,000	190,000
				APIC	1,700,000	158,000
				Retained earnings	1,940,000	830,000
					$8,000,000	$1,890,000

a. Compute the Equity Investment balance as of January 1, 2019.

$Answer

b. Show the computation to yield the $120,000 equity income reported by the parent for the year ended December 31, 2019.

Do not use negative signs with your answers.

Subsidiary net income
Less: Amortization
Less: Depreciation	Answer
		Answer

c. Show the computation to yield the $1,800,000 Equity Investment account balance reported by the parent at December 31, 2019.

Do not use negative signs with your answers.

Equity investment at 1/1/19		Answer
	Answer
	Answer	Answer
Equity investment at 12/31/19		Answer

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

Consolidation Journal
	Description	Debit	Credit
[C]		Answer	Answer
		Answer	Answer
	Equity investment	Answer	Answer
[E]	Common Stock	Answer	Answer
	APIC	Answer	Answer
		Answer	Answer
		Answer	Answer
[A]	PPE, net	Answer	Answer
	Patent	Answer	Answer
	Licenses	Answer	Answer
		Answer	Answer
		Answer	Answer
[D]		Answer	Answer
		Answer	Answer
	Patent	Answer	Answer
	Licenses	Answer	Answer

e. Prepare the consolidated spreadsheet for the year ended December 31, 2019.

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	$4,800,000	$1,300,000						Answer
Cost of goods sold	(3,500,000)	(774,000)						Answer
Gross profit	1,300,000	526,000						Answer
Equity income	120,000	-		[C]	Answer			Answer
Operating expenses	(720,000)	(340,000)		[D]	Answer			Answer
Net income	$700,000	$186,000						Answer
Statement of retained earnings
BOY retained earnings	$1,600,000	$680,000		[E]	Answer			Answer
Net income	700,000	186,000						Answer
Dividends	(360,000)	(36,000)				Answer	[C]	Answer
Ending retained earnings	$1,940,000	$830,000						Answer
Balance sheet
Assets
Cash	$720,000	$330,000						Answer
Accounts receivable	1,130,000	280,000						Answer
Inventory	1,450,000	500,000						Answer
Equity investment	1,800,000	-				Answer	[C]	Answer
						Answer	[E]
						Answer	[A]
PPE, net	2,900,000	780,000		[A]	Answer	Answer	[D]	Answer
Patent				[A]	Answer	Answer	[D]	Answer
Licenses				[A]	Answer	Answer	[D]	Answer
Goodwill	-	-		[A]	Answer			Answer
	$8,000,000	$1,890,000						Answer
Liabilities and equity
Accounts payable	$760,000	$122,000						Answer
Accrued liabilities	840,000	160,000						Answer
Long-term liabilities	2,150,000	430,000						Answer
Common stock	610,000	190,000		[E]	Answer			Answer
APIC	1,700,000	158,000		[E]	Answer			Answer
Retained earnings	1,940,000	830,000			-	-		Answer
	$8,000,000	$1,890,000			Answer	Answer		Answer

Answer 1

a Equity investment balance as of January 1, 2019

Equity investment balance as of December 31, 2019 = 1,800,000

Less: Equity income for 2019 = 120,000

Investment Balance as of January 1 , 2019 = 1680000

b.

Subsidiary Net income = 186,000

Less: Depreciation

Property, plant and equipment - 240,000/12 = 20000

Patent - 240,000/8 = 30,000

License -160000/10 = 16000

Total = 66000

=120000

c

Equity investment at 1/1/19 = 1680000

Add: Equity income = 120000

Equity investment at 12/31/16 = 1,800000

d.

Description Debit    Credit

Equity Investment 186000

Equity Income 186000

                                 

Equity income 66000  

Property, Plant and Equipment 20000

Patent 30000

License 16000