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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.

Solutions

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)

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

2022 Income (loss) from Subsidiary $179,000

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

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

----------

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 1 year ago
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