dation spreadsheet for continuous sale of inventory - Equity method Assume that a parent company acquired a subsidiary on January 1, 2013. The purchase price was $500,000 million in excess of the subsidiary’s book value of Stockholders’ Equity on the acquisition date, and that excess was assigned to the following AAP assets: AAP Asset Original Amount Original Useful Life (years) Property, plant and equipment (PPE), net $100,000 20 Customer list

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Consolidation spreadsheet for continuous sale of inventory - Equity method
Assume that a parent company acquired a subsidiary on January 1, 2013. The purchase price was $500,000 million in excess of the subsidiary’s book value of Stockholders’ Equity on the acquisition date, and that excess was assigned to the following AAP assets:


AAP Asset
Original
Amount
Original Useful
Life (years)
Property, plant and equipment (PPE), net $100,000 20
Customer list 175,000 10
Royalty agreement 125,000 10
Goodwill 100,000 indefinite
  $500,000  

 

The AAP assets with a definite useful life have been amortized as part of the parent’s equity method accounting. The Goodwill asset has been tested annually for impairment, and has not been found to be impaired.

Assume that the parent company sells inventory to its wholly owned subsidiary. The subsidiary, ultimately, sells the inventory to customers outside of the consolidated group. You have compiled the following data for the years ending 2015 and 2016:

 

Inventory
Sales
Gross Profit
Remaining
in Unsold
Inventory


Receivable
(Payable)
2016 $68,000 $19,380 $27,200
2015 $43,700 $12,597 $13,237

 

The inventory not remaining at the end of the year has been sold to unaffiliated entities outside of the consolidated group. The parent uses the equity method to account for its Equity Investment.

The financial statements of the parent and its subsidiary for the year ended December 31, 2016, follow in part d. below.

 

a. Show the computation to yield the pre-consolidation $67,837 Income loss from subsidiary reported by the parent during 2016. Hint: Use negative signs with answers when appropriate.

 
 
Plus:
 
 
Less:
 
 
AAP depreciation
 
  Income (loss) from subsidiary
 

 

b. Show the computation to yield the Equity Investment balance of $957,989 reported by the parent at December 31, 2016. Hint: Use negative signs with answers when appropriate.

Common stock
 
APIC
 
Retained earnings
 
BOY unamortized AAP
 
BOY deferred profit
 
Income (loss) from subsidiary
 
Dividends
 
Equity investment
 

 

c. Prepare the consolidation entries for the year ended December 31, 2016.

Consolidation Worksheet
Description Debit Credit
[C]
 
 
 
  Dividends
 
 
 
 
 
 
[E] Common stock
 
 
  APIC
 
 
 
 
 
 
 
 
 
 
[A] PPE net
 
 
  Customer list
 
 
  Royalty agreement
 
 
 
 
 
 
 
 
 
 
[D]
 
 
 
  PPE net
 
 
  Customer list
 
 
 
 
 
 
[Icogs]
 
 
 
 
 
 
 
  To recognize deferred profit on prior year's sale.    
[Isales]
 
 
 
 
 
 
 
[Icogs]
 
 
 
 
 
 
 
  To defer gross profit on the intercompany sale.    
[Ipay]
 
 
 
 
 
 
 

 

d. Prepare the consolidation spreadsheet for the year ended December 31, 2016. Hint: Use negative signs with answers when appropriate.

  Elimination Entries  
  Parent Sub   Dr Cr   Consolidated
Income statement:  
Sales $4,370,000 $783,000 [Isales]
 
   
 
Cost of goods sold (3,059,000) (469,800) [Icogs]
 
 
[Icogs]
 
         
 
[Isales]  
Gross profit 1,311,000 313,200        
 
Income (loss) from subsidiary 67,837   [C]
 
   
 
Operating expenses (830,300) (203,580) [D]
 
   
 
Net income $548,537 $109,620        
 
Statement of retained earnings:  
BOY retained earnings $2,195,488 $404,550 [E]
 
   

 

 

 

Net income 548,537 109,620        
 
Dividends (126,164) (14,251)    
 
[C]
 
EOY retained earnings $2,617,861 $499,919        
 
Balance sheet:  
Assets  
Cash $650,639 $253,087        
 
Accounts receivable 559,360 181,656    
 
[Ipay]
 
Inventory 847,780 233,334    
 
[Icogs]
 
PPE, net 4,078,084 431,694 [A]
 
 
[D]
 
Customer List     [A]
 
 
[D]
 
Royalty agreement     [A]
 
 
[D]
 
Goodwill     [A]
 
   
 
Equity investment 957,989   [Icogs]
 
 
[C]
 
         
 
[E]  
         
 
[A]  
  $7,093,852 $1,099,771        
 
Liabilities and stockholders’ equity  
Accounts payable $327,313 $93,459 [Ipay]
 
   
 
Other current liabilities 403,228 127,943        
 
Long-term liabilities 2,500,000 261,000        
 
Common stock 714,495 52,200 [E]
 
   
 
APIC 530,955 65,250 [E]
 
   
 
Retained earnings 2,617,861 499,919        
 
  $7,093,852 $1,099,771  
 
 
 
 
 
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