Chapter 3, Problem 48P

a.

To determine

Prepare the journal entry to record the acquisition of the subsidiary.

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. Goodwill is an intangible asset associated with one company being purchased from another.

The required journal entry to record the acquisition is as follows:

Date	Account title and Explanation	Post Ref	Debit ($)	Credit ($)
	Equity Investment		$\$1,770,000$
	Common Stock			$\$59,000$
	APIC			$\$1,711,000$
	(To record the acquisition of the subsidiary)

Table (1)

Working notes:

Number of shares exchanged by the parent companyhaving par value of $1 is $59,000$

Market value per share is $30 on the acquisition date.

Calculate fair value of the entire acquired business:

$59,000\text{ shares }\times \$\text{30share}=\$1,770,000$

b.

To determine

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

statement.

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	$\$200,000$
Less: Depreciation/amortization	$50,000$
Equity Income	$\underset{\_}{\underset{\_}{\$150,000}}$

Table (1)

Working notes:

Subsidiary’s net income is $\$200,000$

Depreciation/Amortization is $\$50,000(\$10,000+\$40,000)$

Hence, the equity income reported by the parent is $\$150,000$

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	$\$1,770,000$
Equity Income	$150,000$
Less: Dividends	$60,000$
Ending Equity Investment	$\underset{\_}{\underset{\_}{\$1,860,000}}$

Table (1)

Working notes:

Number of shares exchanged by the parent companyhaving par value of $1 is $59,000$

Market value per share is $30 on the acquisition date.

Calculate fair value of the entire acquired business:

$59,000\text{ shares }\times \$\text{30share}=\$1,770,000$

Equity income of parent company is $\$150,000$

APIC of subsidiary is $\$200,000$.

Dividendof the subsidiary is $\$60,000$

Hence, the ending equity investmentreported by the parent is $\$1,860,000$

d.

To determine

Prepare the consolidation entries for the year ended Dec 31, 2019.

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)		$\$150,000$
	Dividends (S)			$\$60,000$
	Equity Investment (P)			$\$90,000$
	(To eliminate all changes in the Equity Investment account, leaving only beginning balance in the account)
	[E] Common Stock		$\$150,000$
	APIC (S) @BOY		$\$200,000$
	Retained Earnings (S) @BOY		$\$800,000$
	Equity Investment (P)@BOY			$\$1,150,000$
	(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		$\$120,000$
	Patent (S) @ BOY		$\$320,000$
	Goodwill (S) @ BOY		$\$180,000$
	Equity Investment (P) @ BOY			$\$620,000$
	(To assign the remaining Equity Investment account (i.e., unamortizedBOY AAP) to appropriate asset & liability accounts)
	[D] Operating expenses (S)		$\$50,000$
	PPE, net (S)			$\$10,000$
	Patent (S)			$\$40,000$
	(Depreciates/amortizes AAP so that income statement includes theactivity and the balance sheet accounts include ending balances inappropriate accounts)
	[I] No intercompany items in problem

Table (1)

e.

To determine

Prepare the consolidation spreadsheet for the year ended December 31, 2019.

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, 2019 is shown below:

						Elimination entries
Income Statement		Parent		Subsidiary		Dr		Cr		Consolidated
Sales		5,500,000		1,600,000						7,100,000
Cost of goods sold		(3,800,000)		(950,000)						(4,750,000)
Gross Profit		1,700,000		650,000						2,350,000
Investment Income		150,000			[C]	150,000				0
Operating Expenses		(1,000,000)		(450,000)	[D]	50,000				(1,500,000)
Net Income		850,000		200,000						850,000
Statement of Retained Earnings
Beginning Retained Earnings		2,800,000		800,000	[E]	800,000				2,800,000
Net Income		850,000		200,000						850,000
Dividends		(160,000)		(60,000)			[C]	60,000		(160,000)
Ending retained Earnings		3,490,000		940,000						3,490,000
Balance Sheet
Assets
Cash		$300,000		$120,000						$420,000
Accounts receivable		700,000		360,000						1,060,000
Inventory		940,000		600,000						1,540,000
Equity investment		1,860,000					[C]	90,000		0
							[E]	1,150,000
							[A]	620,000
PPE, net		3,400,000		920,000	[A]	120,000	[D]	10,000		4,430,000
Patent					[A]	320,000	[D]	40,000		280,000
Goodwill					[A]	180,000				180,000
		$7,200,000		$2,000,000						$7,910,000
Liabilities and Stockholder'sEquity
Accounts payable		220,000		$100,000						320,000
Accrued liabilities		340,000		180,000						520,000
Long-term Liabilities		450,000		430,000						880,000
Common stock		600,000		150,000	[E]	150,000				600,000
APIC		2,100,000		200,000	[E]	200,000				2,100,000
Retained earnings		3,490,000		940,000						3,490,000
		$7,200,000		$2,000,000		1,970,000		1,970,000		$7,910,000

f.

To determine

Mention the name of the additional assets that will be reported on the consolidated balance sheet and also givethe reason why they were not reportedprior in pre-acquisition financial statements of the parent or the subsidiary

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.

In the consolidation process we recognized the additional assets: the PPE assets, the Patent asset, and Goodwillasset. These assets were previously embedded on the balance sheet of the Parent in the Equity investment account. These are explicitly recognized in the consolidation process and now reported on the consolidated balance sheet.