On January 1, 20X1, Parent Company purchased 80% of the common stock of Subsidia
ID: 2484194 • Letter: O
Question
On January 1, 20X1, Parent Company purchased 80% of the common stock of Subsidiary Company for $316,000. On this date, Subsidiary had common stock, other paid-in capital, and retained earnings of $40,000, $120,000, and $190,000, respectively. Net income and dividends for 2 years for Subsidiary Company were as follows:
20X1 20X2
Net income $50,000 $90,000
Dividends 10,000 20,000
On January 1, 20X1, the only tangible assets of Subsidiary that were undervalued were inventory and building. Inventory, for which FIFO is used, was worth $5,000 more than cost. The inventory was sold in 20X1. Building, which was worth $15,000 more than book value, has a remaining life of 8 years, and straight-line depreciation is used. Any remaining excess is goodwill.
Prepare all necessary elimination entries for the consolidating worksheet of December 31, 20X1. Assume Parent uses the simple equity method of accounting for its in ivestment in Subsidary.
Prepare all necessary elimination entries for the consolidating worksheet of December 31, 20X2. Assume Parent uses the simple equity method of accounting for its in ivestment in Subsidary.
Explanation / Answer
On January 1, 20X1, Parent Company purchased 80% of the common stock of Subsidia