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In: Accounting

Parent acquired Subsidiary on January 1, 2020 at a price $450,000 in excess of book value....

Parent acquired Subsidiary on January 1, 2020 at a price $450,000 in excess of book value. Of that excess, $350,000 was allocated to an unrecorded patent with a 10-year life, with the remainder to goodwill. The parent uses the equity method to account for its investment in its subsidiary.

In 2021, Subsidiary sold to Parent land having a book value of $90,000 for a total price of $244,000.

Financial statements of the two companies for the year ended December 31, 2022 are presented below.

	Parent	Subsidiary
Sales revenue	$7,500,000	$2,450,000
Cost of goods sold	-5,930,000	-1,950,000
Gross profit	1,570,000	500,000
Operating expenses	-1,375,000	-286,000
Income (loss) from subsidiary	179,000	0
Net Income	$374,000	$214,000

Retained Earnings, 1/1/22	$4,045,000	$1,750,000
Net income	374,000	214,000
Dividends	-85,000	-176,000
Retained Earnings, 12/31/22	$4,334,000	$1,788,000

Cash and receivables	$1,750,000	$1,145,600
Inventory	958,000	758,000
Equity investment	2,558,500
Property, plant & equipment (Net)	4,562,980	1,116,590
Total Assets	$9,829,480	$3,020,190

Accounts payable	$980,000	$225,000
Accrued liabilities	142,800	376,500
Notes payable	1,010,200	51,190
Common stock	1,792,000	158,000
Additional paid-in capital	1,578,000	421,500
Retained Earnings, 12/31/22	4,334,000	1,788,000
Total Liabilities and Equities	$9,837,000	$3,020,190

Required:

a. Prepare a schedule showing the computation of Income (loss) from subsidiary on the Parent's pre-consolidation books for 2022.

b. Prepare a schedule showing the computation of Equity Investment on the Parent's pre-consolidation books at December 31, 2022.

c. Prepare the consolidation entries for 2022.

Expert Solution

a. Schedule showing the computation of Income (loss) from subsidiary on the Parent's pre-consolidation books for 2022.

Subsidiary reported Net Income $214,000

Amortization (350,000/10) (35,000)

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2022 Income (loss) from Subsidiary $179,000

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b. Prepare a schedule showing computation of Equity Investment on Parent's pre-consolidation books on December 31, 2022.

Common Stock $158,000

Additional paid-in-capital 421,500

Retained earnings 1788,000

Unamortized excess (450,000-35000*3) 345,000

Unrealized land gain (244,000-90,000) (154,000)

----------------

Equity Investment as at December 31, 2022 2558,500

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c. Prepare the consolidated entries for 2022 -

1. Change due to equity method accounting -

Income (loss) from subsidiary 179,000

Dividends 176,000

Equity Investment 3,000

2. Remove due to subsidiary stockholder equity -

Common stock 158,000

Retained earnings 1788,000

Additional paid-in-capital 421,500

Equity Investments 2367,500

3. Remove inventory at end of the year -

Cost of Goods sold 258,000

Inventory 258,000

ekkarill92 answered 2 years ago

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Parent acquired Subsidiary on January 1, 2020 at a price $450,000 in excess of book value....

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