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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Expert Solution

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.

ekkarill92 answered 7 months ago

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