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Consolidation at the end of the first year subsequent to date of acquisition—Equity method (purchase price...

Consolidation at the end of the first year subsequent to date of acquisition—Equity method (purchase price equals book value) Assume that a parent company acquires its subsidiary on January 1, 2016, by exchanging 40,000 shares of its $1 par value Common Stock, with a market value on the acquisition date of $28 per share, for all of the outstanding voting shares of the acquiree. You have been charged with preparing the consolidation of these two companies at the end of the first year. On the acquisition date, all of the subsidiary’s assets and liabilities had fair values equaling their book values. Following are financial statements of the parent and its subsidiary for the year ended December 31, 2016.

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ANSWER:

1.Consolidation entry of end year:

Here subsidiary account will be eliminated due to change in investment, the equity income of parent's and subsidiary's dividened as declared

Description Debit Credit
Equity income $240,200
Dividends $40,280
Equity investment $199,920

Next the subsidiary'sdate of acquistion stock holders equity to be eliminated because the parent investment is subsidiary

Description Debit Credit
Additional paid in capital 180,000
common stock 112,000
Beginning of year retained earnings 868,000
Equity investment 1,160,000

2. we have to preapre the consolidated spread sheet of the year

consolidated worksheet
Income statement parent subsidiary Dr Cr Consolidated
Cost of goods 2,072,000 1,008,000 3,080,000
Gross of profit 888,000 677,000 $ 1,565,000
Equity income 240,200 C 240,200 0
Operating income 562,400 436,800 999,200
Net income 565,800 240,200 $ 565,800
Statement of retained earnings:
BOY retained earnings 1,881,600 868,000 E 868,000 $ 1,881,600
Net income 565,800 240,200 565,800
Dividends 112,160 40,280 40,280 C 112,160
Ending retained earnings 2,335,240 1,067,920 $ 2,335,240
Balance sheet:
Assets
cash 706,920 432,880 $ 1,139,800
Account receivable 378,880 429,760 808,640
Inventory 574,240 500,640 $ 1,074,880
Equity investment 1,359,920 199,920 C
Property,plnt & equipment PPE, net 2,170,240 926,240 3,096,840
Total 5,190,200 2,289,520 $ 6,119,800
Liabilities & stock holders equity
Account payable 216,640 160,160 $ 376,800
Accured Liabilities 257,520 209,440 466,960
Long term Liabilities 560,000 560,000
Common stock 414,400 112,000 E 112,000 $ 414,400
APIC 1,966,400 180,000 E 180,000 1,966,400
Retained earnings 2,335,240 1,067,920 1,108,200 40,280 2,335,240
Total 5,190,200 2,289,520 1,400,200 1,400,200 6,119,800

Amount of retained earnings and subsidiary and net incom should be eliminated from consolidation during the year.

At the time of consolidation subsidiary amount of dividend should be eliminated.


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