Chapter 3, Problem 47P

a.

To determine

Calculate equity investment balance as of January 1, 2016.

Explanation of Solution

An acquisition of assets is the purchase of a corporation by purchasing its assets rather than its stock. An acquisition is when one company acquires most or all of the shares of another company to gain control over that company. An investment in equity is money which is invested in a company by buying that company's shares in the stock market. Typically, those shares are traded in a stock exchange.

The equity investment balance at the start of the year is equal to the subsidiary's equity of the shareholders plus the [A] assets undepreciated and unamortized balances. Since the [A] assets with a useful life are now depreciated or amortized for two years, the Equity Investment account's starting balance is as follows:

BOY retained earnings of subsidiary is $\$676,200$.

Common stock of subsidiary is $\$87,500$.

APIC of subsidiary is $\$109,200$.

Calculate BOY book value of subsidiary net assets:

$\begin{array}{c}\text{BOY book value of subsidiary}=\text{BOY retained earnings}+\text{Common stock}+\text{APIC}\\ =\$676,200+\$87,500+\$109,200\\ =\$872,900\end{array}$

Particulars	Amount ($)
BOY Stockholders Equity	$\$872,900$
PPE, net $(\$140,000-2\times \$8,750)$	$\$122,500$
Patent $(\$245,000-2\times \$35,000)$	$\$175,000$
License $(\$105,000-2\times \$10,500)$	$\$84,000$
Goodwill	$\$175,000$
Equity investment balance	$\$1,429,400$

Table (1)

Hence, the equity investment balance as of January 1, 2016 is $\$1,429,400$.

b.

To determine

Exhibit computations to yield the parent company's reported Equity Income in its income

statement during 2016.

Explanation of Solution

Equity income is money generated from stock dividends that investors can access by buying dividend-declared stocks or by buying funds that invest in dividend-declared stocks.

The computations to yield the parent company’s reported Equity Investment is as follows:

Particulars	Amount ($)
Subsidiary net income	$\$183,400$
Less: Depreciation/amortization	$54,250$
Equity Income	$\underset{\_}{\underset{\_}{\$129,150}}$

Table (1)

Working notes:

Subsidiary’s net income is $\$183,400$

Depreciation/Amortization is $\$54,250(\$8,750+\$35,000+\$10,500)$

Hence, the equity income reported by the parent is $\$129,150$

c.

To determine

Exhibit computations to yield the parent company's reported Equity Investment.

Explanation of Solution

An investment in equity is money which is invested in a company by buying that company's shares in the stock market. Typically, those shares are traded in a stock exchange.

The computations to yield the parent company’s reported Equity Investment is as follows:

Particulars	Amount ($)
Beginning Equity Investment	$\$1,429,400$
Equity Income	$129,150$
Less: Dividends	$28,000$
Ending Equity Investment	$\underset{\_}{\underset{\_}{\$1,530,550}}$

Table (1)

Working notes:

BOY retained earnings of subsidiary is $\$676,200$.

Common stock of subsidiary is $\$87,500$.

APIC of subsidiary is $\$109,200$.

Calculate BOY book value of subsidiary net assets:

$\begin{array}{c}\text{BOY book value of subsidiary}=\text{BOY retained earnings}+\text{Common stock}+\text{APIC}\\ =\$676,200+\$87,500+\$109,200\\ =\$872,900\end{array}$

Particulars	Amount ($)
BOY Stockholders Equity	$\$872,900$
PPE, net $(\$140,000-2\times \$8,750)$	$\$122,500$
Patent $(\$245,000-2\times \$35,000)$	$\$175,000$
License $(\$105,000-2\times \$10,500)$	$\$84,000$
Goodwill	$\$175,000$
Equity investment balance	$\$1,429,400$

Table (1)

Equity income of parent company is $\$129,150$

APIC of subsidiary is $\$109,200$.

Dividend of the subsidiary is $\$28,000$

Hence, the ending equity investment reported by the parent is $\$1,530,550$

d.

To determine

Prepare the consolidation entries for the year ended Dec 31, 2016.

Explanation of Solution

Consolidated financial statements are a group of entities financial statements that are presented as those of a single economic entity. They are the financial statements of a group in which the parent company and its subsidiaries introduce their assets, liabilities, equity, revenue, expenses and cash flows as those of a single business organization.

Consolidated accounting is used to club a parent company's financial information and one or more subsidiaries. The parent prepares consolidated financial statements through adjustment of entries and elimination of transactions between companies.

The required consolidation journal entries are as follows:

Date	Account title and Explanation	Post Ref	Debit ($)	Credit ($)
	[C] Equity Income (P)		$\$129,150$
	Dividends (S)			$\$28,000$
	Equity Investment (P)			$\$101,150$
	(To eliminate all changes in the Equity Investment account, leaving only beginning balance in the account)
	[E]   Common Stock (S) @ BOY		$\$87,500$
	APIC (S) @BOY		$\$109,200$
	Retained Earnings (S) @BOY		$\$676,200$
	Equity Investment (P)@BOY			$\$872,900$
	(To eliminate the portion of the investment account related to the book value of the subsidiary's Stockholders' Equity @ BOY)
	[A]  PPE, net (S) @ BOY		$\$122,500$
	Patent (S) @ BOY		$\$175,000$
	License (S) @ BOY		$\$84,000$
	Goodwill (S) @ BOY		$\$175,000$
	Equity Investment (P) @ BOY			$\$556,500$
	(To assign the remaining Equity Investment account (i.e., unamortizedBOY AAP) to appropriate asset & liability accounts)
	[D]   EOY Operating expenses (S)		$\$54,250$
	PPE, net (S)			$\$8,750$
	Patent (S)			$\$35,000$
	License (S)			$\$10,500$
	(To record depreciation and amortization expense for the [A] assets)
	[I] No intercompany transactions

Table (1)

e.

To determine

Prepare the consolidation spreadsheet for the year ended December 31, 2016.

Explanation of Solution

Consolidated financial statements are a group of entities financial statements that are presented as those of a single economic entity. They are the financial statements of a group in which the parent company and its subsidiaries introduce their assets, liabilities, equity, revenue, expenses and cash flows as those of a single business organization.

A consolidated balance sheet provides a parent company's assets and liabilities and all of its subsidiaries in a legal document, without any differentiation on which items pertain to which companies.

Consolidation worksheet is an instrument used to prepare a parent's consolidated financial statements and their subsidiaries. It demonstrates the individual book values of companies, the adjustments and eliminations necessary, and the consolidated final values.

The consolidated spreadsheet for the year ended December 31, 2016x is shown below:

						Elimination entries
Income Statement		Parent		Subsidiary		Dr		Cr		Consolidated
Sales		4,802,000		1,308,300						6,110,300
Cost of goods sold		(3,457,300)		(784,700)						(4,242,000)
Gross Profit		1,344,700		523,600						1,868,300
Investment Income		129,150			[C]	129,150				0
Operating Expenses		(720,300)		(340,200)	[D]	54,250				(1,114,750)
Net Income		753,550		183,400						753,550
Statement of Retained Earnings
Beginning Retained Earnings		1,694,700		676,200	[E]	676,200				1,694,700
Net Income		753,550		183,400						753,550
Dividends		(364,000)		(28,000)			[C]	28,000		(364,000)
Ending retained Earnings		2,084,250		831,600						2,084,250
Balance Sheet
Assets
Cash		$719,600		$337,400						$1,057,000
Accounts receivable		1,229,200		303,800						1,533,000
Inventory		1,624,000		389,900						2,013,900
Equity investment		1,530,550					[C]	101,150		0
							[E]	872,900
							[A]	556,500
PPE, net		2,923,200		721,000	[A]	122,500	[D]	8,750		3,757,950
Patent					[A]	175,000	[D]	35,000		140,000
License					[A]	84,000	[D]	10,500		73,500
Goodwill					[A]	175,000				175,000
		$8,026,550		$1,752,100						$8,750,350
Liabilities and Stockholder's Equity
Accounts payable		702,800		$124,600						827,400
Accrued liabilities		835,800		163,100						998,900
Long-term Liabilities		2,100,000		436,100						2,536,100
Common stock		527,100		87,500	[E]	87,500				527,100
APIC		1,776,600		109,200	[E]	109,200				1,776,600
Retained earnings		2,084,250		831,600						2,084,250
		$8,026,550		$1,752,100		1,612,800		1,612,800		$8,750,350