In: Accounting
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.
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.