Consolidation at the end of the first year subsequent to dat

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 $27 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 Parent Subsidiary Parent Subsidiary Balance sheet Income statement Sales Cost of goods sold Gross profit Equity income Operating expenses $ 2,960,000 $1,675,000 Assets (2,072,000) (1,008,000) Cash $ 696,920 432,880 378,880 349,760 574,240 500,640 888,000 667,000 Accounts receivable 230,200 -Inventory (562,400) (436,800) Equity investment 1,279,920 $555,800 $230,200 Property, plant & equipment 2,170,240 926,240 Net income $5,100,200 $2,209,520 Statement of retained earnings BOY retained earnings Net income 1,881,600 868,000 Liabilities and stockholders\' equity 555,800 230,200 Accounts payable (112,160) 30,280) Accrued liabilities s 2325,240 $1,067,920 Long-term liabilities $216,640 160,160 257,520 209,440 560,000 414,400 112,000 1,886,400 00,000 2,325,240 1,067,920 $5,100,200 $2,209,520 Dividends Ending retained earnings Common stock APIC Retained earnings

Solution

A. Journal Entry at the of date Acquisition

Particulars

Debit

Credit

Equity Investment

1,080,000

Common Stock

40,000

Additional Paid in Capital

1,040,000

b. Computation to yield the Equity Investment Reported by the parent in the amount of $1,279,920

Equity Investment at 01/01/16                $

1,080,000

Plus: Equity Income                     

230,200

Less : Dividends

30,280

199,920

Equity Investment at 12/31/16                 $

1,279,920

C. Consolidation Entries for the year ended December 31, 2016

(C )Particulars

Debit

Credit

Equity Income

230,200

Dividend

30,280

Equity Investment

199,920

(E )Particulars

Debit

Credit

Common Stock

112,000

APIC

100,000

BOY Retained Earnings

868,000

Equity Investment

10,80,000

d. Prepare the consolidated spreadsheet for the year Ended December 31,2016

Consolidation Worksheet

Income Statement

Parent

Subsidiary

Dr

Cr

Consolidated

Sales

2,960,000

1,675,000

$

4,635,000

Cost of goods Sold

(2,072,000)

(1,008,000)

(3,080,000)

Gross Profit

888,000

667,000

$

1,555,000

Equity Income

230,200

C

230,200

0

Operating Income

(562,400)

(436,800)

(999,200)

Net Income

555,800

230,200

$

555,800

Statement of retained earnings:

BOY retained Earnings

1,881,600

868,000

E

868,000

$

1,881,600

Net Income

555,800

230,200

230,200

555,800

Dividends

(112,160)

(30,280)

C

30,280

(112,160)

Ending retained Earnings

2,325,240

1,067,920

$

2,325,240

Balance Sheet

Consolidation Worksheet

Assets

Parent

Subsidiary

Dr

Cr

Consolidated

Cash

696,920

432,880

$

1,129,800

Account Receivable

378,880

349,760

728,640

Inventory

574,240

500,640

$

1,074,880

Equity Investment

1,279,920

199,920

C

1,080,000

E

0

Property Plant & Equipment PPE, Net

2,170,240

926,240

3,096,840

5,100,200

2,209,520

$

6,029,800

Liabilities & Stockholders’ equity

Accounts Payable

216,640

160,160

$

376,800

Accrued 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

1,886,400

100,000

E

100,000

1886,400

Retained Earnings

2,325,240

1,067,920

1,098,200

30,280

2,325,240

5,100,200

2,209,520

6,029,800

Particulars	Debit	Credit
Equity Investment	1,080,000
Common Stock		40,000
Additional Paid in Capital		1,040,000