Question

Parent purchased Subsidiary on January 1, 2015. The parent uses the equity method to account for its investment in its subsidiary. The excess of investment cost over book value was allocated as follows:  

Equipment (20-yr life)	$ 130,000
Customer list (10-yr life)	184,000
Patent (10-yr life)	147,000
Goodwill	139,000
Total	$ 600,000

Parent regularly sells merchandise to Subsidiary. In 2017, inter-company sales amounted to $50,100, with $16,300 of deferred profit remaining in ending inventory. Year-end inter-company receivables/payables amounted to $18,900.

In 2018, inter-company sales amounted to $87,400 with $23,800 of deferred profit remaining in ending inventory. Year-end inter-company receivables/payables amounted to $37,500.

Financial statements of Parent and Subsidiary for the year ended December 31, 2018, are presented below.

	Parent	Subsidiary
Sales Revenue	$ 5,706,000	$ 1,833,500
Cost of Goods Sold	(4,003,800)	(1,110,650)
Gross Profit	1,702,200	722,850
Operating Expenses	(931,020)	(336,800)
Income (loss) from Subsidiary	338,950
Net Income	$ 1,110,130	$ 386,050

Retained Earnings, 1/1/18	$ 3,204,030	$ 980,010
Net Income	1,110,130	386,050
Dividends	(154,690)	(42,520)
Retained Earnings, 12/31/18	$ 4,159,470	$ 1,323,540

Cash and Receivables, 1/1/18	$ 1,566,130	$ 1,067,340
Inventory	1,158,650	690,270
Equity Investment	2,155,740
PP&E net	5,358,920	1,327,490
Total Assets	$ 10,239,440	$ 3,085,100

Accounts Payable	$ 708,300	$ 311,210
Accrued Liabilities	803,130	370,650
Notes Payable	2,940,000	665,300
Common Stock	860,940	183,950
Additional Paid-in Capital	767,600	230,450
Retained Earnings, 12/31/18	4,159,470	1,323,540
Total Liabilities & Equities	$ 10,239,440	$ 3,085,100

Required:

a. Prepare the 2018 journal entries, required by the equity method, on Parent's pre-consolidation books.

b.         Prepare the consolidation entries for 2018.

Answer 1

Ans: Pre Consolidation Entries in Equity Method

    Journal Entries

Date	Particulars	Debit ($)	Credit ($)
	Investment In Subsidiary A/c Dr. To Equity Income in Subsidiary A/c ( Being Income in subsidiary Recorded)	338,950	338,950
	Cash A/c Dr. To Investment in Equity A/c ( Being Dividend Received From Subsidiary)	37,333	37,333

Holding in Subsidiary = Share in Profit of the subsidiary / profit in Subsidiary

= $338,950/$386,050

= 87.80%

Dividend received by parent = $42,520*87.80%

= $37,333

2) Consolidation Entries

Date	Particulars	Dr. ($)	Cr. ($)
	Profit & Loss A/c Dr. To Inventory in Subsidiary A/c ( Being entry for elimination of profit on Inventory of subsidiary)	23,800	23,800
	Account Payable of Subsidiary A/c Dr. To Account Receivable A/c ( Being Intra-company Account Receivable And Account Payable eliminated)	37,500	37,500