Chapter 3, Problem 52P

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 balance of the Equity Investment account at the beginning of the year equals the subsidiary's Stockholders' Equity plus the [A] assets' undepreciated and unamortized balances. Since the [A] assets with a useful life have now been depreciated or amortized for 4 years, the Equity Investment account's starting balance is as follows:

BOY retained earnings of subsidiary is $\$254,800$.

Common stock of subsidiary is $\$32,800$.

APIC of subsidiary is $\$40,000$.

Calculate BOY stockholders equity of subsidiary:

$\begin{array}{c}\text{BOY stockholders equity of subsidiary}=\text{BOY retained earnings}+\text{Common stock}+\text{APIC}\\ =\$254,800+\$32,800+\$40,000\\ =\$327,600\end{array}$

Particulars	Amount ($)
BOY Stockholders Equity	$\$327,600$
Licenses $(\$160,000-4\times \$16,000)$	$\$96,000$
Goodwill	$\$100,000$
Equity investment balance	$\$523,600$

Table (1)

Hence, the equity investment balance as of January 1, 2016 is $\$523,600$.

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	$\$58,800$
Less: Depreciation/amortization	$16,000$
Equity Income	$\underset{\_}{\underset{\_}{\$74,800}}$

Table (1)

Working notes:

Subsidiary’s net income is $\$58,800$

Depreciation/Amortization is $\$16,000$

Hence, the equity income reported by the parent is $\$74,800$

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	$\$523,600$
Equity Income	$74,800$
Less: Dividends	$0$
Ending Equity Investment	$\underset{\_}{\underset{\_}{\$448,800}}$

Table (1)

Working notes:

BOY retained earnings of subsidiary is $\$254,800$.

Common stock of subsidiary is $\$32,800$.

APIC of subsidiary is $\$40,000$.

Calculate BOY stockholders equity of subsidiary:

$\begin{array}{c}\text{BOY stockholders equity of subsidiary}=\text{BOY retained earnings}+\text{Common stock}+\text{APIC}\\ =\$254,800+\$32,800+\$40,000\\ =\$327,600\end{array}$

Particulars	Amount ($)
BOY Stockholders Equity	$\$327,600$
Licenses $(\$160,000-4\times \$16,000)$	$\$96,000$
Goodwill	$\$100,000$
Equity investment balance	$\$523,600$

Table (1)

Equity income of parent company is $\$74,800$

Dividend of the subsidiary is $\$0$

Hence, the ending equity investment reported by the parent is $\$448,800$

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 Investment (P)		$\$74,800$
	Equity Income (P)			$\$74,800$
	(To eliminate all changes in the Equity Investment account, leaving only beginning balance in the account)
	[E]  Common Stock (S) @ BOY		$\$32,800$
	APIC (S) @BOY		$\$40,000$
	Retained Earnings (S) @BOY		$\$254,800$
	Equity Investment (P)@BOY			$\$327,600$
	(To eliminate the portion of the investment account related to the book value of the subsidiary's Stockholders' Equity @ BOY)
	[A]  Licenses (S) @ BOY		$\$96,000$
	Goodwill (S) @ BOY		$\$100,000$
	Equity Investment (P) @ BOY			$\$196,000$
	(To assign the remaining Equity Investment account (i.e., unamortizedBOY AAP) to appropriate asset & liability accounts)
	[D]  EOY Operating expenses (S)		$\$16,000$
	Licenses			$\$16,000$
	(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, 2016 is shown below:

						Elimination entries
Income Statement		Parent		Subsidiary		Dr		Cr		Consolidated
Sales		1,266,000		493,200						1,759,200
Cost of goods sold		(911,600)		(296,000)						(1,207,600)
Gross Profit		354,400		197,200						551,600
Investment Income (loss)		(74,800)					[C]	74,800		0
Operating Expenses		(192,000)		(256,000)	[D]	16,000				(464,000)
Net Income (loss)		87,600		(58,800)						87,600
Statement of Retained Earnings
Beginning Retained Earnings		579,600		254,800	[E]	254,800				579,600
Net Income		87,600		(58,800)						87,600
Dividends		(17,200)					[C]	0		(17,200)
Ending retained Earnings		650,000		196,000						650,000
Balance Sheet
Assets
Cash		$308,000		$8,800						$316,800
Accounts receivable		324,000		114,400						438,400
Inventory		491,200		146,800						638,000
Equity investment		448,800			[C]	74,800	[E]	327,600		0
							[A]	196,000
PPE, net		1,056,000		272,000	[A]	0	[D]	0		1,328,000
Licenses					[A]	96,000	[D]	16,000		80,000
					[A]	0	[D]	0		0
Goodwill					[A]	100,000				100,000
		$2,628,000		$542,000						$2,901,200
Liabilities and Stockholder's Equity
Accounts payable		185,200		$47,200						232,400
Accrued liabilities		220,000		61,600						281,600
Long-term Liabilities		800,000		164,400						964,400
Common stock		188,800		32,800	[E]	32,800				188,800
APIC		584,000		40,000	[E]	40,000				584,000
Retained earnings		650,000		196,000						650,000
		$2,628,000		$542,000		$614,400		$614,400		$2,901,200

f.

To determine

Prepare the journal entry to write off the Licenses.

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.

Goodwill is an intangible asset associated with one company being purchased from another. In particular, goodwill is the portion of the purchase price which is higher than the sum of the net fair value of all the assets purchased during the acquisition and the liabilities assumed during the acquisition process. If the acquired assets are not a business, then as an asset acquisition, the reporting entity shall account for the transaction or other event. Goodwill impairment is an accounting charge recorded by companies when the carrying value of the goodwill on the financial statements exceeds its fair value. Goodwill is recorded in accounting after a company retains assets and liabilities, and needs to pay a price that exceeds its identifiable net value. Goodwill impairment testing must be performed annually and every year on about the same date. Companies can either choose to run the quantitative impairment test specifically, or take advantage of the opportunity to undertake a qualitative impairment test. If a company chooses to perform a qualitative impairment test, then the company must perform a quantitative impairment test if the appropriate events and circumstances signify that it is more probable than not that a reporting unit's fair value is lower than its carrying amount

The following journal entry to write-off the licenses is as follows    :

Date	Accounting Explanation	Amount ($)	Amount ($)
	Equity income from S	$\$80,000$
	Equity investment		$\$80,000$
	(to write down the book value of customer list)

Table (1)

In preparation of the consolidated financial statements, the company will reclassify the $16,000 amortization of the licenses (taken during the year) to the loss incurred on write-down of the licenses. This means that the total loss on writing down the licenses equals $96,000 for the year ($16,000 + $80,000).

Because the fair value of the subsidiary ($340,000) is less than the book value of the equity investment account ($448,800), Goodwill is therefore potentially impaired Goodwill impairment is an accounting charge recorded by companies when the carrying value of the goodwill on the financial statements exceeds its fair value.

The implied fair value of goodwill is computed as follows:

Particulars	Amount ($)
Fair value of the subsidiary	$\$340,000$
Fair value of the net assets after write-off of the customer list exclusive of goodwill	$320,000$
Implied fair value of goodwill	$\$20,000$
Book value of goodwill	$100,000$
Goodwill impairment	$\$(80,000)$

Table (1)

Hence, the goodwill asset is found to be impaired.

Goodwill is an intangible asset associated with one company being purchased from another. Goodwill impairment is an accounting charge recorded by companies when the carrying value of the goodwill on the financial statements exceeds its fair value.

Goodwill with the following journal entry has to be written down to its implied value of $20,000:

Date	Accounting Explanation	Amount ($)	Amount ($)
	Equity income from S	$\$80,000$
	Equity investment		$\$80,000$
	(to write down the book value of goodwill)

Table (1)

Goodwill will now be reported at $20,000 on the consolidated balance sheet, and a loss on goodwill write- down will be reported in the consolidated income statement. Thereafter, the goodwill asset cannot be written up if the fair value of the subsidiary improves.

g.

To determine

Prepare the consolidated balance sheet and the consolidated income statement and consolidated statement of retained earnings 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.

A consolidated income statement describes an overall view of the organization as a

whole, instead of its component parts. Any money owed between the companies included

in the statement will not be regarded.

The retained earnings statement (retained earnings statement) is a financial report explaining the adjustments in a company's retained earnings over a specified period.

Consolidated Income  Statement				Consolidated Balance Sheet
				Assets
Sales		$1,759,200		Cash		$316,800
Cost of goods sold		(1,207,600)		Accounts Receivable		438,400
Gross Profit		551,600		Inventory		638,000
Less: Operating Expenses		(448,000)		PPE, net		1,328,000
Write off of Licenses		96,000
Loss on Impairment of Goodwill		80,000
Net Income		$(72,400)
				Goodwill		20,000
						$2,741,200
Consolidated Statement of Retained Earnings
				Liabilities
BOY retained Earnings		$579,600		Accounts Payable		$232,400
Net Loss		(72,400)		Accrued Liabilities		281,600
Less: Dividends		(17,200)		Long-term Liabilities		964,400
Ending Retained Earnings		$490,000		Common Stock		188,800
				APIC		584,000
				Retained Earnings		490,000
						$2,741,200