Statemsnts Of Lncome And Retained Eamingsfar The Year Ended ✓ Solved

Statemsnts Of Lncome And Retained Eamingsfar The Year Ended

Prepare Parent Company's Equity-Method Journal Entries to record the operating results of the subsidiary and any entry necessary to record depreciation and/or amortization of Subsidiary's Net Assets. Note that with respect to Building Depreciation 1/2 is CoGS and 1D is charged to operating expense. Patent amortization is '100o/" CoGS. Also prepare any necessary year end elimination entry or entries, Prepare a working paper for consolidated financial statements and prepare a complete set of consolidated financial statements, in good form for 2011 - be sure to include a consolidated statement of cash flows.

Paper For Above Instructions

The financial reporting landscape is complex, especially when dealing with business combinations and consolidations. A well-structured approach is essential to ensure that the appropriate equity method journal entries are recorded accurately, reflecting the financial position of the parent and its subsidiaries. In this paper, we will outline the necessary journal entries, elimination entries, and the preparation of consolidated financial statements for Palm Corporation and its subsidiary, Starr Company, for the year ended December 31, 2011.

Part 1: Equity-Method Journal Entries

The equity method is utilized when an investor has significant influence but does not control an investee, typically represented by ownership of 20% to 50% of voting shares. As Palm Corporation owns a significant stake in Starr Company, it is essential to record the operating results from Starr Company accurately.

1. Recording the Operating Results

For the year ended December 31, 2011, Palm Corporation must record its investment in Starr's net income. Given that Starr reported a net income of $48,000, the journal entry for recognizing this would be:

  


Debit: Investment in Starr Company   $48,000  


Credit: Investment Income                        $48,000

2. Recording Depreciation and Amortization

Given that the subsidiary has assets with useful lives requiring depreciation or amortization, the journal entry needs to account for these adjustments. For Starr Company, operating expenses include $20,000 of depreciation. The parent must record its share of this, which is split between the cost of goods sold and operating expenses as follows:

 


Debit: Cost of Goods Sold                  $10,000  


Debit: Operating Expenses                     $10,000  


Credit: Accumulated Depreciation          $20,000

Part 2: Year-End Elimination Entries

Elimination entries are necessary to avoid double counting when preparing consolidated financial statements. In this case, we have to eliminate intercompany transactions, specifically the dividends paid by Starr to Palm. Given Starr paid dividends of $24,000 to Palm (for 40,000 shares at $0.60 per share), the elimination entry is:

 


Debit: Dividends Received                   $24,000  


Credit: Investment in Starr Company     $24,000

Part 3: Preparing Working Papers

The working paper for consolidated financial statements provides a framework for combining the financial results of both entities. It includes adjustments for the fair value of assets identified during the acquisition. The fair value adjustments of assets for Starr had the following residuals:

  • Plant Assets: Fair Value Adjustment of $10,000

  • Patent (net): Fair Value Adjustment of $5,000

These adjustments must be reflected in the consolidated balance sheet to ensure accurate representation of assets:

Consolidated Balance Sheet Adjustments



Assets: 


Plant Assets: $60,000 + $10,000 = $70,000


Patents: $20,000 + $5,000 = $25,000

Part 4: Consolidated Financial Statements

The complete consolidated financial statements would include:

Consolidated Statement of Income

  • Total Revenue: $1,138,000 (including revenue from both companies)

  • Total Expenses: $1,045,000

  • Net Income: $93,000

Consolidated Statement of Cash Flows

The cash flow statement would consolidate the cash inflows and outflows from both companies, adjusting for intercompany transactions, while reflecting the actual cash activity of the combined entity. It would report net cash flows from operating activities, investing activities, and financing activities accurately accounting for dividends and capital contributions.

Conclusion

In conclusion, proper accounting for business combinations, including equity method journal entries and elimination entries, is paramount for accurate financial reporting. The outlined processes ensure that the rights and obligations of both parent and subsidiary are respected and accurately represented in consolidated financial statements, allowing stakeholders to receive a true and fair view of financial performance.

References

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