Question

tion Equity method ging 59.000 Shares of $30 per share, for e the consolidation LOZ luc Com shares of the first year. individual net values that equaled 00 (depreciation auisition date, allowing: PPE assets inte sot that has a fair value o 320,000 (amor c. Prepare the consolid d. Explain why the (ADJ) consolidating enllyn 48. Consolidation at the end of the first year subsequent to date of acquisition- Assume the parent company acquires its subsidiary on January 1, 2019. by exchangin its Si par value Common Stock, with a market value on the acquisition date of $30 the outstandine voting shares of the acquiree. You have been charged with preparing the for of these two companies at the end of the first year. On the acquisition date, all of the subsidiary's individual net assets had fair value their book values except for the following: PPE assets are undervalued by $120.000 de $10,000 per year), and the subsidiary has an unrecorded Patent that has a fair value of $3201 tization - $40,000 per year). Any remaining difference between the purchase price and the the identifiable assets results from expected synergies that are expected to be realized as a business combination. Following are financial statements of the parent and its subsidiary for the year ended Deca od the fair value of d as a result of the ded December 31, 2019: Parent Subsidiary Parent Subsidiary $120,000 $1,600,000 (950,000) 650,000 360,000 Income statement: Sales ........ $5,500,000 Cost of goods sold..... (3,800,000) Gross profit. 1.700,000 Equity income.......... 150,000 Operating expenses......... (1,000,000) Net income............ $ 850,000 Balance sheet: Assets Cash Accounts receivable.. Inventory ....... Equity investment... Property, plant and equipment (PPE), net... $ 300,000 700,000 940,000 1,860,000 3,400,000 $7,200,000 600,000 (450,000) $ 200,000 920,000 $2,000,000 Statement of retained earnings: Beginning retained earnings... $2,800,000 Net income... 850,000 Dividends.. (160,000) Ending retained earnings ..... $3,490,000 $ 800,000 $ 800,000 200,000 (60,000) $940,000 Liabilities and stockholders' equity Accounts payable... Accrued liabilities ... Long-term liabilities... Common stock APIC...... Retained earnings ........ $ 220,000 340,000 450,000 600,000 2,100,000 3,490,000 $7,200,000 $100,000 180,000 430,000 150,000 200,000 940,000 $2,000,000 a. Prepare the journal entry to record the acquisition of the subsidiary. b. Show the computations to yield the equity income of $150,000 reported by the parent in its income statement. c. Show the computations to yield the Equity Investment reported by the parent in the amount of $1,860,000. d. Prepare the consolidation entries for the year ended December 31, 2019. e. Prepare the consolidated spreadsheet for the year ended December 31, 2019. What additional assets have been recognized on the consolidated balance sheet that were not explicitly reported on the balance sheets of either the parent or the subsidiary? Why were they not previously reported in pre-acquisition financial statements of the parent or the subsidiary?

Answer 1

a) Journal Entry in the books of Parent Company at the date of acquisition

Date	Particulars	Debit $	Credit $	Calculation
01-Jan-19	Investment in Subsidiary A/c……………………Dr	1,770,000		59000X30
	To Share Capital A/c		59,000	59000X1
	To Additional Capital A/c		1,711,000	59000X29

b) Calculation to show equity income of $ 150000

Particulars	Amount $
Net income of subsidiary	200,000
Minus Depreciation of PPE valuation at the time of acquisition	(10,000)
Minus Amortisation of Patent fair Valued at the time of acquisition	(40,000)
Net equity income from subsidiary	150,000

c) Computation of equity investment reported by Parent $ 1860000

Particulars	Amount $
Investment value at the time of acquisition 1 Jan 2019	1,770,000
Add Equity income for the period	150,000
Deduct Devidend received from subsidiary	(60,000)
Investment value at the time of acquisition 31 Dec 2019	1,860,000

d and e) Consolidated financial statement

	Parent	Subsidy	Elimination	Consolidated Balance sheet
Assets
Cash	300,000	120,000		420,000
Account receivables	700,000	360,000		1,060,000
Inventory	940,000	600,000		1,540,000
Equity investment	1,860,000	-	(1,860,000)	-
PPE	3,400,000	920,000	110,000	4,430,000
Intangible assets				-
Patent			280,000	280,000
Goodwill			180000	180,000
Total Assets	7,200,000	2,000,000	(1,290,000)	7,910,000
Liability and Stockholders equity
Account payables	220,000	100,000		320,000
Accrued liabilities	340,000	180,000		520,000
Long term liabilities	450,000	430,000		880,000
Common stock	600,000	150,000	(150,000)	600,000
APIC	2,100,000	200,000	(200,000)	2,100,000
Retained earnings	3,490,000	940,000	(940,000)	3,490,000
Total Liabilities	7,200,000	2,000,000	(1,290,000)	7,910,000

Note - Elimination column give the consolidation entries

Calculation of 110000 in elimination - PPE valuation 120,000 - 10,000 = 110,000

Calculation of 280000 in elimination - 320000 - 40000 = 280000

Calculation of Goowill

Investment in subsidiary on 1 jan	1,770,000
Valuation of PPE	(120,000)
Valuation of Patent	(320,000)
Common stock of subsidiary	(150,000)
APIC of Subsidiary	(200,000)
Retained earnings of Subsidiary on 1 jan	(800,000)
Goodwill	180,000

Note - Only first 5 parts are solved in this sum