Homework Answers
The basic principle of consolidation is that inter-company balances get eliminated and only the figures which represent the transactions with the external parties appear in the balance sheet or the profit and loss.
Taking the above rule into account, we would account the following captions in the way described below-
a) Inventory
Inventory would be sum total of Parent and subsidiary balances. So, it would be $1,190,000.
b) Equity Investment
The investment of the parent in the subsidiary would get eliminated and the final figure would reflect the investment in the third parties.
So, the investment of parent in the subsidiary is $450,000, so
Total Equity Investment - $ 2,500,000
Less : Subsidiary Investment - ($450,000)
Net Investment $2,050,000
c) Property, Plant and Equipment (net of accumulated depreciation)
It would be sum total of the parent and subsidiary plant assets plus an increase in the asset by $225,000 due to undervaluation.
Parent Plant - $ 3,190,000
Subsidiary Plant - $ 1,205,000
Add : Undervaluation - $ 225,000
Total Plant and Equipment $ 4,620,000
d) Goodwill
There would be no goodwill which would arise due to consolidation.
e) Common Stock
Common Stock would be the parent equity capital, $200,000.
f) Additional Paid-in capital
It would be the parent capital, $ 5,000,000.
g) Retained Earnings
It would be the sum total of both the companies, $ 3,204,600.
g) Total Intangible Assets
Trademark - $ 175,000
Customer List - $ 60,000
Total - $ 235,000
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