Question

Parent acquired Subsidiary on January 2, 2015, at a price $250,000 in excess of book value. Of that excess, $170,000 was allocated to an unrecorded Customer List with a 10-year life, with the remainder to Goodwill. The parent uses the equity method to account for its investment in its subsidiary.

On January 2, 2018, Subsidiary sold equipment to Parent for $80,000. The equipment had a cost of $90,000 and accumulated depreciation of $37,000. The remaining life of the equipment was estimated at 6 years. Financial statements for the two companies for the year ended December 31, 2019, are presented below.

	Parent	Subsidiary
Sales Revenue	$ 6,500,000	$ 2,000,000
Cost of Goods Sold	(4,800,000)	(1,200,000)
Gross Profit	1,700,000	800,000
Operating Expenses	(840,000)	(470,000)
Income (loss) from Subsidiary	317,500
Net Income	$ 1,177,500	$ 330,000

Retained Earnings, 1/1/19	$ 5,812,100	$ 1,556,000
Net Income	1,177,500	330,000
Dividends	(245,000)	(40,000)
Retained Earnings, 12/31/19	$ 6,744,600	$ 1,846,000

Cash & Receivables	$ 1,306,400	$ 650,000
Inventory	1,506,900	813,000
Equity Investment	2,471,000
PP&E net	7,640,000	2,640,000
Total Assets	$ 12,924,300	$ 4,103,000

Accounts Payable	$ 776,000	$ 207,000
Accrued Liabilities	809,000	322,000
Notes Payable	1,350,000	1,250,000
Common Stock	423,700	83,000
Additional Paid-in Capital	2,830,000	395,000
Retained Earnings, 12/31/19	6,744,600	1,846,000
Total Liabilities and Equities	$ 12,924,300	$ 4,103,000

Required:

a. Prepare the journal entries on the books of Parent and Subsidiary to record the equipment sale.

b. Compute the amount of unrealized gain at January 1, 2019.

c. Prepare entries required under the equity method on Parent's pre-consolidation books for 2019.

d. Prepare the consolidation entries for 2019.  

Answer 1

Solution(a): Following are the required journal entries:

Particulars	Amount($) Debit	Amount($) Credit
Cash A/c	80,000
Accumulated depreciation A/C	37,000
Equipment A/C		90,000
Gain on sale A/C		27,000
(To record sale of equipment on subsidiary books)
Equipment A/C	80,000
Cash A/C		80,000
(To record equipment Purchased by parent)

Solution(b): Calculation of unrealised gain:

Particulars	Amount ($)
Total gain	27,000
Less: Realised gain(27000/6)	4,500
Unrealised gain	22,500

Solution (c): Following are the required journal entries (under equity method):

Particulars	Amount($) debit	Amount($) credit
Equity investment A/c	330,000
Equity income A/c		330,000
(To recognize equity in subsidiary's reported net income)
Equity income A/c	17,000
Equity investment A/c		17,000
(To recognize amortization)
Equity investment A/c	4,500
Equity income A/c		4,500
(To recognize realisation of gain on equipment sale)
Cash A/c	40,000
Equipment investment A/c		40,000
(To recognize subsidiary's dividends)

Notes: Amortization = 170,000/10 = $17,000

Solution(d): Following are the required journal entries for 2019:

Particulars	Amount($) debit	Amount($) credit
Equity income A/c	317,500
Dividends A/c		40,000
Equity investment A/c		277,500
(To eliminate equity income and dividends)
Common stock A/c	83,000
Retained earnings A/c	1,556,000
Additional paid-in capital A/c	395,000
Equity investment A/c		2,034,000
(To eliminate subsidiary's stockholder's equity)
Patent A/c	80,000
Goodwill A/c	80,000
Equity investment A/c		160,000
(To allocate excess to subsidiary's assets)
Amortization expense A/c	17,000
Patent A/c		17,000
(To record amortization)
Equity investment A/c	22,500
PP&E net A/c		22,500
(To adjust equipment (net) to consolidated value)
PP&E net A/c	4,500
Depreciation expense A/c		4,500
(To record realisation of gain on equipment sale)