Consolidation spreadsheet for continuous sale of inventory - Equity method Assum
ID: 2342122 • Letter: C
Question
Consolidation spreadsheet for continuous sale of inventory - Equity method
Assume that a parent company acquired a subsidiary on January 1, 2013. The purchase price was $500,000 million in excess of the subsidiary’s book value of Stockholders’ Equity on the acquisition date, and that excess was assigned to the following AAP assets:
The AAP assets with a definite useful life have been amortized as part of the parent’s equity method accounting. The Goodwill asset has been tested annually for impairment, and has not been found to be impaired.
Assume that the parent company sells inventory to its wholly owned subsidiary. The subsidiary, ultimately, sells the inventory to customers outside of the consolidated group. You have compiled the following data for the years ending 2015 and 2016:
The inventory not remaining at the end of the year has been sold to unaffiliated entities outside of the consolidated group. The parent uses the equity method to account for its Equity Investment.
The financial statements of the parent and its subsidiary for the year ended December 31, 2016, follow in part d. below.
a. Show the computation to yield the pre-consolidation $67,837 Income loss from subsidiary reported by the parent during 2016. Hint: Use negative signs with answers when appropriate.
CashAccounts receivableInventoryPPE, netCustomer listRoyalty agreementGoodwillAccounts payableOther current liabilitiesLong-term liabilitiesNet income of subsidiarySalesCost of goods soldPrior year intercompany gross profitCurrent year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investmentAPICCommon stockBOY retained earningsEOY retained earningsBOY unamortized AAPBOY deferred profitDividendsAnswerPlus:AnswerCashAccounts receivableInventoryPPE, netCustomer listRoyalty agreementGoodwillAccounts payableOther current liabilitiesLong-term liabilitiesNet income of subsidiarySalesCost of goods soldPrior year intercompany gross profitCurrent year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investmentAPICCommon stockBOY retained earningsEOY retained earningsBOY unamortized AAPBOY deferred profitDividendsAnswerLess:AnswerCashAccounts receivableInventoryPPE, netCustomer listRoyalty agreementGoodwillAccounts payableOther current liabilitiesLong-term liabilitiesNet income of subsidiarySalesCost of goods soldPrior year intercompany gross profitCurrent year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investmentAPICCommon stockBOY retained earningsEOY retained earningsBOY unamortized AAPBOY deferred profitDividendsAnswerAnswerCashAccounts receivableInventoryPPE, netCustomer listRoyalty agreementGoodwillAccounts payableOther current liabilitiesLong-term liabilitiesNet income of subsidiarySalesCost of goods soldPrior year intercompany gross profitCurrent year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investmentAPICCommon stockBOY retained earningsEOY retained earningsBOY unamortized AAPBOY deferred profitDividendsAnswer Income (loss) from subsidiaryAnswer
b. Show the computation to yield the Equity Investment balance of $957,989 reported by the parent at December 31, 2016. Hint: Use negative signs with answers when appropriate.
c. Prepare the consolidation entries for the year ended December 31, 2016.
AnswerCashAccounts receivableInventoryPPE, netCustomer listRoyalty agreementGoodwillAccounts payableOther current liabilitiesLong-term liabilitiesNet income of subsidiarySalesCost of goods soldPrior year intercompany gross profitCurrent year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investmentAPICCommon stockBOY retained earningsEOY retained earningsBOY unamortized AAPBOY deferred profitDividends
AAP Asset Original
Amount Original Useful
Life (years) Property, plant and equipment (PPE), net $100,000 20 Customer list 175,000 10 Royalty agreement 125,000 10 Goodwill 100,000 indefinite $500,000
Explanation / Answer
a) When an equity method is used to record the equity investment, every year the investment is adjusted to the share of profits and losses from the subsidiary company. The share of profit from the subsidiary company is recognized as revenue in the Parent’s income statement with a corresponding increase in the Equity investment value and vice versa with the share of losses from the subsidiary company.
When a subsidiary pays dividend, even for that the equity investment value will be reduced, as it is treated as repayment of the investment.
The parent company reports its equity income from Subsidiary company on December 31, 2016 as $149,150. Dividends paid were $48,000 Balance sheet shows the equity investment value as $1,630,550. The value in the balance sheet is after increasing the investment value with the share of profits and decreasing the value by dividends during 2016 from the subsidiary company. So the equity investment balance as of January 1, 2016 will be $1,630,550 - $149,150 +$48,000 = $1,529,400.
b) Amortization will be calculated only on Patents and Licenses as they have definite life. Intangible assets with indefinite life will not be amortized. Only if there is any impairment, it will be recorded. It is given that there is no impairment on goodwill. So the Amortization to be adjusted is
Patents - $245,000/7 = $35,000
Licenses - $105,000/10 = $10,500
Total Amortization is $35,000 + $10,500 = $45,500
Depreciation on PPE - $140,000/16 = $8,750
Computation to yield $149,150 will be as follows:
Subsidiary net income
$ 203,400
Less: Amortization
$ 45,500
Less: Depreciation
$ 8,750
Equity income reported by parent
$ 149,150
c) The equity investment as said above will be adjusted for the equity income and dividends from the subsidiary company
Equity Investment at 1/1/16
$1,529,400
Plus: Equity Income
$ 149,150
Less: Dividends
$ 48,000
Equity Investment at 12/31/16
$1,630,550
d) Consolidation Entries for the year ended December 31, 2016
Consolidation Journal
Description
Debit
Credit
C)
Equity income A/c
$149,150
To Dividends A/c
$ 48,000
To Equity Investment A/c
$101,150
E)
Common Stock A/c
$ 87,500
APIC
$109,200
BOY Retained Earnings A/c
$676,200
To Equity Investment A/c
$872,900
A)
PPE, net
$140,000
Patents
$245,000
Licenses
$105,000
Goodwill
$275,000
To Equity Investment A/c
$765,000
D)
Operating Expenses A/c
$54,250
PPE, net
$ 8,750
Patents
$35,000
Licenses
$10,500
e) Consolidation Worksheet
Consolidation Worksheet
Parent
Subsidiary
Debit
Credit
Consolidated
Income Statement
Sales
$4,802,000
$1,328,300
$6,130,300
Cost of goods sold
(3,457,300)
( 784,700)
(4,242,000)
Gross profit
1,344,700
543,600
1,888,300
Equity Income
149,150
0
C)
149,150
0
Operating expenses
(720,300)
(340,200)
D)
54,250
(1,114,750)
Net Income
$773,500
$203,400
$773,550
Statement of Retained Earnings
BOY Retained earnings
$1,694,700
$676,200
E)
676,200
$1,694,700
Net Income
773,500
203,400
773,550
Dividends
(384,000)
(48,000)
48,000
C)
(384,000)
Ending retained earnings
$2,084,250
$831,600
$2,084,250
Balance Sheet
Assets
Cash
$719,600
$337,400
$1,057,000
Accounts Receivable
$1,229,200
$303,800
$1,533,000
Inventory
$1,624,000
$389,900
$2,013,900
Equity Investment
$1,630,550
$101,150
C)
$(108,500)
$872,900
E)
$765,000
A)
PPE, net
$2,923,200
$721,000
A)
$140,000
$8,750
D)
$3,775,450
Patent
A)
$245,000
$35,000
D)
$210,000
Licenses
A)
$105,000
$10,500
D)
$94,500
Goodwill
A)
$275,000
$275,000
$8,126,550
$1,752,100
$8,850,350
Liabilities and equity
Accounts Payable
$702,800
$124,600
$827,400
Accrued liabilities
$835,800
$163,100
$998,900
Long-term liabilities
$2,100,000
$436,100
$2,536,100
Common Stock
$527,100
$87,500
E)
$87,500
$527,100
APIC
$1,876,600
$109,200
E)
$109,200
$1,876,600
Retained earnings
$2,084,250
$831,600
$2,084,250
$8,126,550
$1,752,100
$1,841,300
$1,841,300
$8,850,350
Subsidiary net income
$ 203,400
Less: Amortization
$ 45,500
Less: Depreciation
$ 8,750
Equity income reported by parent
$ 149,150
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