Question

C2.       Parent acquired Subsidiary on January 2, 2019 at a price $400,000 in excess of book value. Of that excess, $160,000 was allocated to an unrecorded Customer List with a 8-year life, with the remainder to Goodwill. The parent uses the equity method to account for its investment in its subsidiary.

On January2, 2022, Subsidiary sold equipment to Parent for $120,000. The equipment had a cost of $85,000 and accumulated depreciation of $40,000. The remaining life of the equipment was estimated at 8 years. Financial statements for the two companies for the year ended December 31, 2023 are presented below.

	Parent	Subsidiary
Sales revenue	$687,000	$750,000
Cost of goods sold	-425,000	-350,000
Gross profit	262,000	400,000
Operating expenses	-125,000	-36,700
Income (loss) from subsidiary	352,675	_________
Net Income	$489,675	$363,300
Retained Earnings, 1/1/23	$620,400	$240,000
Net income	489,675	363,300
Dividends	-98,000	-12,000
Retained Earnings, 12/31/23	$1,012,075	$591,300
Cash and receivables	$850,000	$750,000
Inventory	125,000	265,000
Equity investment	1,249,450
Property, plant & equipment (Net)	1,387,625	1,337,860
Total Assets	$3,612,075	$2,352,860
Accounts payable	$55,000	$311,210
Accrued liabilities	450,000	370,650
Notes payable	1,250,000	665,300
Common stock	95,000	183,950
Additional paid-in capital	750,000	230,450
Retained Earnings, 12/31/23	1,012,075	591,300
Total Liabilities and Equities	$3,612,075	$2,352,860

Required:

1. Prepare entries required under the equity method on Parent's pre-consolidation books for 2023.

2. Prepare the consolidation entries for 2023.

Answer 1

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