Question

A parent company acquired 100 percent of the stock of a subsidiary company on January 1, 2013, for $800,000. On this date, the balances of the subsidiary’s stockholders’ equity accounts were Common Stock, $50,000, Additional Paid-in Capital, $55,000, and Retained Earnings, $195,000. On the acquisition date, the excess was assigned to the following AAP assets:

					Original Amount		Original Useful Life
Property, plant & equipment					300,000		10	years
Customer list					200,000		8	years
Royalty agreement					180,000		8	years
Goodwill					120,000		Indefinite

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 2015 and 2016:

	Intercompany Sales		Gross Profit Remaining in Unsold Inventory			Receivable (Payable)
2016	$39,000		$7,000			$27,000
2015	$59,000		$9,500			$14,000

The inventory not remaining at the end of a given year is sold to unaffiliated entities outside of the consolidated group during the next year. The parent uses the cost method of pre-consolidation Equity Investment bookkeeping.

The financial statements of the parent and its subsidiary for the year ended December 31, 2016, follow:

				Parent		Subsidiary								Parent		Subsidiary
Income statement									Balance sheet
Sales				$4,350,000		$800,000			Assets
Cost of goods sold				(3,050,000)		(480,000)			Cash					$650,000		350,000
Gross profit				1,300,000		320,000			Accounts receivable					560,000		180,000
Income (loss) from subsidiary				15,000		-			Inventory					850,000		250,000
Operating expenses				(830,000)		(200,000)			Equity investment					1,100,000		-
Net income				485,000		120,000			Property, plant & equipment					4,000,000		420,000
Statement of retained earnings														$7,160,000		$1,200,000
BOY retained earnings				$2,000,000		505,000			Liabilities and stockholders' equity
Net income				485,000		120,000			Accounts payable					$350,000		$100,000
Dividends				(125,000)		(15,000)			Other current liabilities					400,000		125,000
Ending retained earnings				$2,360,000		610,000			Long-term liabilities					2,500,000		260,000
									Common stock					700,000		50,000
									APIC					850,000		55,000
									Retained earnings					2,360,000		610,000
														7,160,000		1,200,000

a. BOY [ADJ] for consolidation at December 31, 2016

b. Consolidating entries

Answer 1