Question

7-Parent purchased Subsidiary on January 1, 2019. 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-year life) $400,000 Customer list (10-year life) 90,000 Patent (5-year life) 125,000 Goodwill 165,000 Total $780,000 Parent regularly sells merchandise to Subsidiary. In 2021, inter-company sales amounted to $60,100, with $18,000 of deferred profit remaining in ending inventory. Year-end inter-company receivables/payables amounted to $24,000.

Answer 1

Solution ;

a).

Date	Particulars	Debit	Credit
	Investment in subsidiary a/c	282300
	To Equity income in subsidiary		282300
	(Recorded income in subsidiary)
	Cash a/c	9324
	To Investment in equity a/c		9324
	(Divident received from subsidiary)

Working note *

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

                              = 282300 / 363300 = 77.7 %

Divident received by parent = 12000 * 77.7% = $ 9324

b) . Consolidation entries

Date	Particulars	Debit	Credit
	Profit & loss a/c	45000
	To Inventory in subsidiary a/c		45000
	(Elimination of profit on inventory of subsidiary)
	Accounts payable of subsidiary a/c	35000
	To Accounts receivable a/c		35000
	(Eliminated intra - company accounts receivable and accounts payable)