Question

50. Prepare consolidation spreadsheet for intercompany sale of equipment-Equity method Assume a parent company acquired its subsidiary on January 1, 2015, at a purchase price that was $222,000 in excess of the book value of the subsidiary's Stockholders' Equity on the acquisition date. Of that excess, $132,000 was assigned to a Customer List that is being amortized over a 10-year period. The remaining $90,000 was assigned to Goodwill. In January of 2018, the wholly owned subsidiary sold Equipment to the parent for a cash price of $72,000. The subsidiary had acquired the equipment at a cost of $84,000 and depreciated the equipment over its 10-year useful life using the straight-line method (no salvage value). The subsidiary had depreciated the equipment for 4 years at the time of sale. The parent retained the depreciation policy of the subsidiary and depreciated the equipment over its remaining 6-year useful life. Following are financial statements of the parent and its subsidiary for the year ended December 31, 2019. The parent uses the equity method to account for its Equity Investment. The Customer List was amortized as part of the parent's equity method accounting.

a. Prepare the journal entry that the subsidiary made to record the sale of the equipment to the parent, the journal entry that the parent made to record the purchase, and the [I] entries for the year of sale. b. Compute the remaining portion of the deferred gain on January 1, 2019. c. Show the computation to yield the $74,400 of Income (loss) from subsidiary reported by the parent for the year ended December 31, 2019. d. Compute the Equity Investment balance of $540,000 on December 31, 2019. e. Prepare the consolidation entries for the year ended December 31, 2019. f. Prepare the consolidation spreadsheet for the year ended December 31, 2019.

Parent Parent Subsidiary Income statement: Sales... Cost of goods sold Gross profit. Income (loss) from subsidiary. Operating expenses... Net income. Statement of retained earnings: Beginning retained earnings.. Net income Dividends Ending retained earnings. $4,800,000 (3,480,000) 1,320,000 74,400 (1,094,400) $ 300,000 $ 192,000 258,000 330,000 618,000 0 Subsidiary Balance sheet: $720,000 Assets (420,000) Cash..... 300,000 Accounts receivable Inventory... 0 PPE, net... (216,000) Equity investment. $ 84,000 Liabilities and stockholders' equity $168,000 Accounts payable... 84,000 Other current liabilities (12,000) Long-term liabilities.. $240,000 Common stock .... APIC.... Retained earnings 330,000 420,000 780,000 3,030,000 540,000 $5,100,000 $1,398,000 $2,268,000 300,000 (168,000) $2,400,000 $ 390,000 480,000 900,000 330,000 600,000 2,400,000 $5,100,000 $ 99,600 120,000 780,000 68,400 90,000 240,000 $1,398,000

Answer 1

Calculation of Amortization of AAP Assets Assets Initial Value life [A] [B] $ 132,000 90,000 $ 222,000 Amortization per year [A/B] 10$ 13,200 Customer list Goodwill Total 13,200 Calculation of Unamortized AAP as on 01/01/2019 Assets Customer list Goodwill Initial Value (as Total Years from Accumulated Unamortized Value on 01/01/15) 2015 to 2018 Amortization per year Amortization as on 01/01/19 [A] [B] [C] [D= B x C] [A-D] $ 132,000 4 $ 13,200 $ 52,800 $ 79,200 90,000 4 90,000 $ 222,000 $ 13,200 $ 52,800 $ 169,200 Total $ $ Cost of Price of Equipment sold Life of Equipment (in years) Depreciation per year (84,000 / 10) Equipment used by Subsidiary (years) Accumulated depreciation at the date of sale (8,400 x 4) Book value at the date of sale (84,000 - 33,600) Sale proceeds Gain/ (loss) on sale (72,000 - 50,400) 84,000 10 8,400 4 33,600 50,400 72,000 21,600 $ $ $ $ $ Depreciation recorded by parent (72,000 / 6) Depreciation recorded by subsidiary Excess depreciation recorded by parent 12,000 (8,400) 3,600 $

a. No. Debit Credit Journal Entry to record the transactions Account titles and Explanation 1 Entry made by Subsidiary Cash Accumulated depreciation Equipment Gain on sale (to record sale) $ $ 72,000 33,600 $ $ 84,000 21,600 $ 72,000 2 Entry made by Parent Equipment Cash (to record purchase) $ 72,000 [lgain] Gain on sale $ 21,600 12,000 $ 33,600 Equipment Accumulated depreciation (to adjust the gain, equipment and accumulated depreciation on the date of the intercompany transfer) [Idep] $ 3,600 Accumulated depreciation Depreciation expense (is to eliminate the excess depreciation recorded by parent) $ 3,600

b. Deferred gain at January 1, 2019 Gain on sale of equipment as on 01/01/2018 Less: Excess depreciation charged in 2018 Deferred gain at January 1, 2019 21,600 3,600 18,000 C. Computation of Income (loss) from subsidiary Net Income of subsidiary Add: Confirmed gain at Intercompany sale Less: Amortization expenses of AAP Assets Income (loss) from subsidiary 84,000 3,600 (13,200) 74,400 $ d. Compute the equity investment Balance BOY Subsidiary retained earnings Subsidiary common stock Subsidiary APIC BOY Unamortized AAP Equity Income Deferred gain on Intercompany sale at BOY Subsidiary Dividends Equity Investment 168,000 68,400 90,000 169,200 74,400 (18,000) (12,000) 540,000

E. Transaction [C] Debit Credit 74,400 Consolidation Entries Account titles and explanation Income (loss) from subsidiary Dividends Equity Investment (to eliminate the equity income) 12,000 62,400 [S] Common stock BOY Retained Earnings APIC Equity Investment (to eliminate the stockholders' equity of subsidiary) 68,400 168,000 90,000 326,400 [A] 79,200 90,000 Customer List Goodwill Equity Investment (to record the Unamortized AAP Assets as on 01/01/19) 169,200 [D] 13,200 Operating expense Customer list (to record the amortization of AAP assets) 13,200 [lgain] 18,000 12,000 Equity Investment Equipment Accumulated Depreciation (to eliminate the deferred gain on intercompany equipment sale) 30,000 [Idep] Accumulated Depreciation 3,600 Operating expense 3,600 (to eliminate the excess depreciation) Note: In Place of Operating expense "Depreciation expense" can be used as well as there is no head as Depreciation expense in Income statement hence operation expenses has been used.

f. Consolidation Spreadsheet Adjustments Debit Credit Parent Subsidiary Consolidated Totals S Income Statement Sales Cost of goods sold Gross Profit Income(loss) from subsidiary Operating expenses Net Income 5,520,000 (3,900,000) 1,620,000 $ $ 4,800,000 $ (3,480,000) $ 1,320,000 $ 74,400 (1,094,400) $ 300,000 $ | 720,000 (420,000) 300,000 [C] (216,000) [D] 84,000 74,400 13,200 3,600 [Idep] (1,320,000) 300,000 $ 168,000 $ Statement of Retained Earnings BOY Retained Earnings Net Income Dividends EOY Retained Earnings $ 2,268,000 $ 300,000 (168,000) $ 2,400,000 $ 168,000[S] 84,000 (12,000) 240,000 2,268,000 300,000 (168,000) 2,400,000 12,000[C] $

$ $ Balance Sheet Cash Accounts receivable Inventory PPE, Net 330,000 $ 420,000 780,000 3,030,000 522,000 678,000 1,110,000 3,633,600 30,000 [lgain] 192,000 258,000 330,000 618,000 [Igain] [Idep] [A] [A] [lgain] - 12,000 3,600 79,200 90,000 18,000 Customer List Goodwill 13,200 [D] 66,000 90,000 Equity Investment 540,000 62,400 [C] 326,400[S] 169,200 [A] Total Assets $ 5,100,000 $ 1,398,000 $ 6,099,600 $ Liabilities and Stockholders' Equity Accounts payable Other current liabilities Long term liabilities Common stock APIC Retained Earnings Total Liabilities and Stockholders' Equity $ 390,000 $ 480,000 900,000 330,000 600,000 2,400,000 $ 5,100,000 $ 99,600 120,000 780,000 68,400[S] 90,000[S] 240,000 1,398,000 68,400 90,000 489,600 600,000 1,680,000 330,000 600,000 2,400,000 6,099,600 $ 616,800 $ 616,800 $

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