Question

Consolidation spreadsheet for continuous sale of inventory - Equity method
Assume that a parent company acquired a subsidiary on January 1, 2016. The purchase price was $600,000 in excess of the subsidiary’s book value of Stockholders’ Equity on the acquisition date, and that excess was assigned to the following AAP assets:

AAP Asset	Original Amount	Original Useful Life (years)
Property, plant and equipment (PPE), net	$120,000	20
Customer list	210,000	10
Royalty agreement	150,000	10
Goodwill	120,000	indefinite
	$600,000

The AAP assets with a definite useful life have been amortized as part of the parent’s equity method accounting. The Goodwill asset has been tested annually for impairment, and has not been found to be impaired.

Assume that the parent company sells inventory to its wholly owned subsidiary. The subsidiary, ultimately, sells the inventory to customers outside of the consolidated group. You have compiled the following data for the years ending 2018 and 2019:

	Inventory Sales	Gross Profit Remaining in Unsold Inventory	Receivable (Payable)
2019	$81,600	$24,000	$32,400
2018	$51,600	$14,400	$15,600

The inventory not remaining at the end of the year has been sold to unaffiliated entities outside of the consolidated group. The parent uses the equity method to account for its Equity Investment.

The financial statements of the parent and its subsidiary for the year ended December 31, 2019, follow in part d below.

a. Show the computation to yield the pre-consolidation $80,400 Income loss from subsidiary reported by the parent during 2019.

CashAccounts receivableInventoryPPE, netCustomer listRoyalty agreementGoodwillAccounts payableOther current liabilitiesLong-term liabilitiesNet income of subsidiarySalesCost of goods soldPrior year intercompany gross profitCurrent year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investmentAPICCommon stockBOY retained earningsEOY retained earningsBOY unamortized AAPDividends
Plus:	AnswerCashAccounts receivableInventoryPPE, netCustomer listRoyalty agreementGoodwillAccounts payableOther current liabilitiesLong-term liabilitiesNet income of subsidiarySalesCost of goods soldPrior year intercompany gross profitCurrent year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investmentAPICCommon stockBOY retained earningsEOY retained earningsBOY unamortized AAPDividends
Less:	CashAccounts receivableInventoryPPE, netCustomer listRoyalty agreementGoodwillAccounts payableOther current liabilitiesLong-term liabilitiesNet income of subsidiarySalesCost of goods soldPrior year intercompany gross profitCurrent year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investmentAPICCommon stockBOY retained earningsEOY retained earningsBOY unamortized AAPDividends
AAP depreciation
	Income (loss) from subsidiary

b. Show the computation to yield the Equity Investment balance of $1,152,000 reported by the parent at December 31, 2019.

Common stock
APIC
Retained earnings
BOY unamortized AAP
BOY deferred profit
Income (loss) from subsidiary
Dividends
Equity investment

c. Prepare the consolidation entries for the year ended December 31, 2019.

d. Prepare the consolidation spreadsheet for the year ended December 31, 2019.

				Elimination Entries
	Parent	Sub		Dr	Cr		Consolidated
Income statement:
Sales	$5,160,000	$939,600	[Isales]
Cost of goods sold	(3,600,000)	(564,000)	[Icogs]			[Icogs]
						[Isales]
Gross profit	1,560,000	375,600
Income (loss) from subsidiary	80,400		[C]
Operating expenses	(996,000)	(243,600)	[D]
Net income	$644,400	$132,000
Statement of retained earnings:
BOY retained earnings	$2,619,600	$486,000	[E]
Net income	644,400	132,000
Dividends	(144,000)	(18,000)				[C]
EOY retained earnings	$3,120,000	$600,000
Balance sheet:
Assets
Cash	$756,000	$300,000
Accounts receivable	672,000	228,000				[Ipay]
Inventory	1,020,000	276,000				[Icogs]
PPE, net	4,800,000	516,000	[A]			[D]
Customer List			[A]			[D]
Royalty agreement			[A]			[D]
Goodwill			[A]
Equity investment	1,152,000		[Icogs]			[C]
						[E]
					Answer	[A]
	$8,400,000	$1,320,000
Liabilities and stockholders’ equity
Accounts payable	$360,000	$110,400	[Ipay]
Other current liabilities	480,000	152,400
Long-term liabilities	3,000,000	313,200
Common stock	816,000	60,000	[E]	Answer			Answer
APIC	624,000	84,000	[E]
Retained earnings	3,120,000	600,000
	$8,400,000	$1,320,000

Answer 1

ANSWER:

Required a) Computation to yield the pre-consolidation $80,400 Income loss from subsidiary reported by the parent during 2019.

Particulars	Amout
Net income of Subsidiary	132,000
Recognition of prior year gross profit	14,400
Less: Current year gross profit inventory	(24,000)
Less: Depreciation of assets (WN)	(42,000)
	80,400

Required b) Computation to yield the Equity Investment balance of $1,152,000 reported by the parent at December 31, 2019.

Particulars	Amount
Beginning Retained earninng of subsidiary	486,000
Common stock of subsidiary	60,000
APIC of Subsidiary	84,000
Income from subsidiary	80,400
Less: Gross profit of inventory previous year	(14,400)
Less: Dividend	(18,000)
Unamortized AAP assets (WN)	474,000
Equity balance as at 31st December	1,152,000

Working Notes:

AAP assets	Original Amount (A)	Useful Life (B)	Depreciation(C = A / B)	3 Years Depreciation (D = C * 3)	Value (A - D)
Property, plant and equipment (PPE), net	120,000	20	6,000	18,000	102,000
Customer list	210,000	10	21,000	63,000	147,000
Royalty agreement	150,000	10	15,000	45,000	105,000
Goodwill	120,000				120,000
	600,000		42,000	126,000	474,000

Required c) Consolidation entries for the year ended December 31, 2019

Particulars	Debit	Credit
Income from Subsidiary	80,400
To Equity investment		80,400
Common Stock	60,000
Retained earning	600,000
To Equity investment		660,000
Property, plant & equipment (WN)	102,000
Customer list (WN)	147,000
Royalty agreement (WN)	105,000
Goodwill (WN)	120,000
To Equity investment (WN)		474,000
Operating expenses	42,000
To Property, plant & equipment (WN)		6,000
To Customer list (WN)		21,000
To Royalty agreement (WN)		15,000
Dividend	18,000
To Equity investment		18,000
Accounts Payable	32,400
To Account receivable		32,400
Equity Investment	14,400
To Cost of good sold		14,400
Sales	81,600
To Cost of good sold		81,600
Cost of Good sold	24,000
To Inventory		24,000

Required d) Consolidation spreadsheet for the year ended December 31, 2019

			Elimination entries
	Parent	Sub	Dr	Cr	Consolidated
Income Statement
Sales	5,160,000	939,600		(81,600)	6,018,000
Cost of goods sold	(3,600,000)	(564,000)	72,000		(4,092,000)
Gross profit	1,560,000	375,600	72,000	(81,600)	1,926,000
Income (loss) from Subsidiary	80,400			(80,400)
Operating expenses	(996,000)	(243,600)		(42,000)	(1,281,600)
Net Income	644,400	132,000	72,000	(204,000)	644,400
Balance sheet
Assets
Cash	756,000	300,000			1,056,000
Acccount receivable	672,000	228,000		(32,400)	867,600
Inventory	1,020,000	276,000		(24,000)	1,272,000
PPE, net	4,800,000	516,000	96,000		5,412,000
Customer list			126,000		126,000
Royalty agreement			90,000		90,000
Goodwill			120,000		120,000
Equity invetsment	1,152,000			(1,152,000)
	8,400,000	1,320,000	432,000	(1,208,400)	8,943,600
Liabilities and stockholder's equity
Accounts payable	360,000	110,400		(32,400)	438,000
Other current liabilities	480,000	152,400			632,400
Long term liabilities	3,000,000	313,200			3,313,200
Common stock	816,000	60,000		(60,000)	816,000
APIC	624,000	84,000		(84,000)	624,000
Retained earning	3,120,000	600,000		(600,000)	3,120,000
	8,400,000	1,320,000		(776,400)	8,943,600