Consolidation at the end of the first year subsequent to date of acquisition-Equ
ID: 2611783 • Letter: C
Question
Consolidation at the end of the first year subsequent to date of acquisition-Equity method (purchase price equals book value) Assume that a parent company acquires its subsidiary on January 1, 2016, by exchanging 40,000 shares of its $1 par value Common Stock, with a market value on the acquisition date of $27 per share, for all of the outstanding voting shares of the acquiree. You have been charged with preparing the consolidation of these two companies at the end of the first year On the acquisition date, all of the subsidiary's assets and liabilities had fair values equaling their book values. Following are financial statements of the parent and its subsidiary for the year ended December 31, 2016 Parent Subsidiary Parent Subsidiary Balance sheet Income statement Sales Cost of goods sold Gross profit Equity income Operating expenses $ 2,960,000 $1,675,000 Assets (2,072,000) (1,008,000) Cash $ 696,920 432,880 378,880 349,760 574,240 500,640 888,000 667,000 Accounts receivable 230,200 -Inventory (562,400) (436,800) Equity investment 1,279,920 $555,800 $230,200 Property, plant & equipment 2,170,240 926,240 Net income $5,100,200 $2,209,520 Statement of retained earnings BOY retained earnings Net income 1,881,600 868,000 Liabilities and stockholders' equity 555,800 230,200 Accounts payable (112,160) 30,280) Accrued liabilities s 2325,240 $1,067,920 Long-term liabilities $216,640 160,160 257,520 209,440 560,000 414,400 112,000 1,886,400 00,000 2,325,240 1,067,920 $5,100,200 $2,209,520 Dividends Ending retained earnings Common stock APIC Retained earningsExplanation / Answer
A. Journal Entry at the of date Acquisition
Particulars
Debit
Credit
Equity Investment
1,080,000
Common Stock
40,000
Additional Paid in Capital
1,040,000
b. Computation to yield the Equity Investment Reported by the parent in the amount of $1,279,920
Equity Investment at 01/01/16 $
1,080,000
Plus: Equity Income
230,200
Less : Dividends
30,280
199,920
Equity Investment at 12/31/16 $
1,279,920
C. Consolidation Entries for the year ended December 31, 2016
(C )Particulars
Debit
Credit
Equity Income
230,200
Dividend
30,280
Equity Investment
199,920
(E )Particulars
Debit
Credit
Common Stock
112,000
APIC
100,000
BOY Retained Earnings
868,000
Equity Investment
10,80,000
d. Prepare the consolidated spreadsheet for the year Ended December 31,2016
Consolidation Worksheet
Income Statement
Parent
Subsidiary
Dr
Cr
Consolidated
Sales
2,960,000
1,675,000
$
4,635,000
Cost of goods Sold
(2,072,000)
(1,008,000)
(3,080,000)
Gross Profit
888,000
667,000
$
1,555,000
Equity Income
230,200
C
230,200
0
Operating Income
(562,400)
(436,800)
(999,200)
Net Income
555,800
230,200
$
555,800
Statement of retained earnings:
BOY retained Earnings
1,881,600
868,000
E
868,000
$
1,881,600
Net Income
555,800
230,200
230,200
555,800
Dividends
(112,160)
(30,280)
C
30,280
(112,160)
Ending retained Earnings
2,325,240
1,067,920
$
2,325,240
Balance Sheet
Consolidation Worksheet
Assets
Parent
Subsidiary
Dr
Cr
Consolidated
Cash
696,920
432,880
$
1,129,800
Account Receivable
378,880
349,760
728,640
Inventory
574,240
500,640
$
1,074,880
Equity Investment
1,279,920
199,920
C
1,080,000
E
0
Property Plant & Equipment PPE, Net
2,170,240
926,240
3,096,840
5,100,200
2,209,520
$
6,029,800
Liabilities & Stockholders’ equity
Accounts Payable
216,640
160,160
$
376,800
Accrued Liabilities
257,520
209,440
466,960
Long-term Liabilities
560,000
560,000
Common Stock
414,400
112,000
E
112,000
$
414,400
APIC
1,886,400
100,000
E
100,000
1886,400
Retained Earnings
2,325,240
1,067,920
1,098,200
30,280
2,325,240
5,100,200
2,209,520
6,029,800
Particulars
Debit
Credit
Equity Investment
1,080,000
Common Stock
40,000
Additional Paid in Capital
1,040,000