Question

Prepare consolidation spreadsheet for intercompany sale of land - Equity method Assume that a parent company acquired its subsidiary on January 1, 2014, at a purchase price that was $300,000 in excess of the book value of the subsidiary's Stockholders' Equity on the acquisition date. Of that excess, $200,000 was assigned to an unrecorded Patent owned by the subsidiary that is being amortized over a 10-year period. The [A] Patent asset has been amortized as part of the parent's equity method accounting. The remaining $100,000 was assigned to Goodwill. In 2015, the wholly owned subsidiary sold Land to the parent for $100,000. The Land was reported on the subsidiary's balance sheet for $70,000 on the date of sale. The parent uses the equity method to account for its Equity Investment. Financial statements of the parent and its subsidiary for the year ended December 31, 2016 are presented in d. below: a. Show the computation to yield the $32,500 of Income (loss) from subsidiary reported by the parent for the year ended December 31, 2016. Hint: Use negative signs with answers when appropriate. Net income of subsidiary 0 Income (loss) from subsidiary b. Show the computation to yield the $505,675 Equity Investment account balance reported by the parent on December 31, 2016. Hint: Use negative signs with answers when appropriate. Common stock APIC 0 BOY Retained earnings 0 BOY Unamortized AAP Gain on intercompany sale of land 0 Income (loss) from subsidiary 0 Dividends Equity investment Prepare the consolidation entries for the year ended December 31, 2016 C. Consolidation Worksheet Credit Debit Description 0 0 [C] 0 0 Dividends 0 0 0 0 Common stock [E] 0 0 APIC 0 0 0 0 0 Patent [A] 0 0 0 0 0 [D] 0 0 [gain] 0 0 o 41 d. Prepare the consolidation spreadsheet for the year ended December 31, 2016. Hint: Use negative signs with answers when appropriate. Elimination Entries Parent Sub Dr Cr Income statement: $3,000,000 Sales $375,000 Cost of goods (225,000) (2,100,000) sold Gross profit 900,000 150,000 Income (loss) from subsidiary 32,500 0 Operating (570,000) (97,500) 0 expenses $362,500 $52,500 Net income Statement of retained earnings: BOY retained $1,477,200 $193,750 earnings 362,500 52,500 Net income (83,375) (6,825) Dividends 0 EOY retained $1,756,325 $239,425 earnings Balance sheet Assets Cash $341,566 $121,211 Balance sheet: Assets $121,211 Cash $341,566 Accounts 87,000 384,000 receivable Inventory 582,000 111,750 PPE, net 2,799,600 206,750 Patent 0 Goodwill 0 Equity 505,675 0 0 investment 0 0 Liabilities and stockholders equity Accounts $224,700 $44,760 payable Other 276,816 61,276 current liabilities Long-term liabilities 1,500,000 125,000 490,500 Common stock 25,000 0 APIC 364,500 31,250 Retained 239,425 1,756,325 earnings $4,612,841 $526,711

Answer 1

Activity for the 100% AAP through december 31, 20X3 Original Amount Original Useful life Amortization per year (A) |{A/B} in years (B) AAP Patent 200,000 10 20,000 100,000 Indefinite Goodwill Year Ended December 31, 100% AAP Amortization Dr (Cr) 20X1 20X2 20X3 - Patent 20,000 20,000 20,000 Goodwill Net Amortization 20,000 20,000 20,000 December 31, Jan.1 100% Unamortized AAP Dr (Cr) 20X1 20X1 20X2 20X3 Patent 200,000 140,000 180,000 160,000 Goodwill 100,000 100,000 100,000 100,000 Net unamortizated 280,000 240,000 300,000 260,000 *Value at the year ended was Value at the beginning of the year -Amortization during the year Computation of Gain(Loss) on Sale of land by Subsidiary in 20X2 Transfer price of Land Less: Book Value Gain on Sale on Land 100,000 (70,000) 30,000

|a. Computation of Inome (loss) from Subsidiary Net Income of Subsidiary AAP Depreciation Income (Loss) from Subsidiary 52,500 (20,000) 32,500 |b. Computation of Equity Investment Common Stock 25,000 APIC BOY Retained Earnings BOY Unamortized AAP Gain on Intercompany sale of land Income (loss) from Subsidiary Dividends Equity Investment 31,250 193,750 260,000 (30,000) 32,500 (6,825) 505,675

C. Prepare the consolidated entries for the year ended December 31, 20X3 Consolidation Worksheet Description Income(loss) from subsidiary Debit Credit [C] 32,500 Dividends 6,825 Equity Investment 25,675 (To record elimination of equity investment from the income (loss) and dividend of subsidiary) [E] Common Stock 25,000 APIC 31,250 BOY Retained Earnings 193,750 Equity Investment 250,000 (To record elimination of equity investment from common stock and additional paid in capital and BOY retained earnings) [A] Patent 160,000 Goodwill 100,000 Equity Investment 260,000 1/1/20X3 by eliminating the (To record unamortized AAP assets as on equity investment) [D] Operating Expense 20,000 Patent 20,000 To record amortization during the year on AAP assets) Lgain] Equity Investment 30,000 PPE net 30,000 To recognize prior year profit on intercompany land sales)

Consolidation Worksheet Subsidiary Credit Consolidated Debit Parent Income statement Sales 3,000,000 (2,100,000) 375,000 3,375,000 (225,000) (2,325,000) Cost of goods sold Gross Profit 900,000 150,000 1,050,000 Equity income [C] 32,500 32,500 Operating Expense (97,500) D (570,000) (687,500) 20,000 Net Income 52,500 362,500 362,500 Statement of retained Earnings BOY retained earnings 193,750 [E 1,477,200 193,750 1,477,200 Net Income 362,500 52,500 362,500 (83,375) Dividends (6,825) [C] (83,375) 6,825 Ending retained earnings 239,425 1,756,325 1,756,325

Balance Sheet Cash 341,566 121,211 462,777 Accounts Receivable 384,000 87,000 471,000 Inventory PPE,net 582,000 111,750 693,750 30,000 gain] 20,000 D] 2,799,600 206,750 2,976,350 Patent [A] 140,000 160,000 Goodwill [A] 100,000 100,000 25,675 [C] 250,000 E] 260,000 A Equity Investment Lgain] 505,675 30,000 526,711 4,843,877 4,612,841 Liabilites and equity Accounts Payable 224,700 44,760 269,460 Other current liabilities 276,816 61,276 338,092 Long-term liabilities 1,500,000 125,000 1,625,000 25,000 [E 31,250 E Common stock 490,500 25,000 490,500 APIC 364,500 364,500 31,250 Retained earnings 1,756,325 239,425 1,756,325 592,500 4,612,841 526,711 592,500 4,843,877