Homework SourseParent acquired Subsidiary on January 1 2016 at a price 3000
Parent acquired Subsidiary on January 1, 2016, at a price $300,000 in excess of book value. Of that excess, $200,000 was allocated to an unrecorded patent with a 10-year life, with the remainder to goodwill. The parent uses the equity method to account for its investment in its subsidiary.
In 2017, Subsidiary sold to Parent land having a book value of $90,000 for a total price of $145,000.
Financial statements of the two companies for the year ended December 31, 2018, are presented below
Required:
a. Prepare a schedule showing the computation of Income (loss) from subsidiary on the Parent\'s pre-consolidation books for 2018.
b. Prepare a schedule showing the computation of Equity Investment on the Parent\'s pre-consolidation books at December 31, 2018.
c. Prepare the consolidation entries for 2018.
| Parent | Subsidiary | ||
| Sales Revenue | $ 2,500,000 | $ 525,000 | |
| Cost of Goods Sold | (1,750,000) | (345,000) | |
| Gross Profit | 750,000 | 180,000 | |
| Operating Expenses | (475,000) | (102,500) | |
| Income (loss) from Subsidiary | 57,500 | ||
| Net Income | $ 332,500 | $ 77,500 | |
| Cost of Goods Sold | (1,750,000) | (345,000) | |
| Gross Profit | 750,000 | 180,000 | |
| Operating Expenses | (475,000) | (102,500) | |
| Income (loss) from Subsidiary | 57,500 | ||
| Net Income | $ 332,500 | $ 77,500 | |
| Retained Earnings, 1/1/18 | $ 840,700 | $ 245,650 | |
| Net Income | 332,500 | 77,500 | |
| Dividends | (52,900) | ||
| Retained Earnings, 12/31/18 | $1,120,300 | $ 314,300 | |
| Cash and Receivables | $ 320,100 | $ 178,200 | |
| Inventory | 461,700 | 278,600 | |
| Equity Investment | 625,400 | ||
| PP&E Net | 1,496,500 | 321,700 | |
| Total Assets | $2,903,700 | $ 778,500 | |
| Accounts Payable | $ 182,400 | $ 55,900 | |
| Accrued Liabilities | 205,300 | 70,200 | |
| Notes Payable | 810,000 | 212,000 | |
| Common Stock | 354,200 | 45,000 | |
| Additional Paid-in Capital | 231,500 | 81,100 | |
| Retained Earnings, 12/31/18 | 1,120,300 | 314,300 | |
| Total Liabilities and Equities | $2,903,700 | $ 778,500 | |
| Required: a. Prepare a schedule showing the computation of Income (loss) from subsidiary on the Parent\'s pre-consolidation books for 2018. b. Prepare a schedule showing the computation of Equity Investment on the Parent\'s pre-consolidation books at December 31, 2018. c. Prepare the consolidation entries for 2018. |
Solution
Computation of Income or loss from subsidary on pre consolidation books -
Net income of Subsidary -77500
Parent\'s share -74%
Income or loss to parent -57500
Computation of Equity Investment
Total Assets 778500
Accounts Payable 55900
Accrued Liabilities 70200
Notes Payable 212000
Equity Investment 440400
Share of Parent -74% 325896
Consolidation Entries
Subsidary a/c dr 325896
Patent in subsidary a/c dr 200000
Goodwill in subsidary a/c dr 100000
To cash A/c 625896
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