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:

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, 2023.

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

d.   Prepare the consolidation entries for 2023.

Answer 1

(a) Journal entries in the books of Subsidiary company for Equipment sale

Cash A/c                                                   Dr.                    120,000

Accumulated Depreciation A/c            Dr.                      40,000

             To Equipment A/c                                                                 85,000

             To Gain on sale of equipment                                             75,000

(Being Equipment sold to Parent company)

Journal entries in the books of Parent company for Equipment purchase

Equipment A/c                                        Dr.                    120,000

           To Cash                                                                                    120,000

(Being equipment purchased from subsidiary)

(b) Unrealized gain for subsidiary company

Cost of the Equipment		85,000
Less : Accumulated Dep		40,000
Written down value		45,000
Sales value		120,000
Gain		75,000