Parent acquired Subsidiary on January 1, 2016, at a price $300,000 in excess of

Question

Parent acquired Subsidiary on January 1, 2016, at a price $300,000 in excess of book value. Of that excess, $200,000 was allocated to an unrecorded patent with a 10-year life, with the remainder to goodwill. The parent uses the equity method to account for its investment in its subsidiary.

In 2017, Subsidiary sold to Parent land having a book value of $90,000 for a total price of $145,000.

Financial statements of the two companies for the year ended December 31, 2018, are presented below.  

Required:

a. Prepare a schedule showing the computation of Income (loss) from subsidiary on the Parent's pre-consolidation books for 2018.

b. Prepare a schedule showing the computation of Equity Investment on the Parent's pre-consolidation books at December 31, 2018.

c. Prepare the consolidation entries for 2018.

Parent Subsidiary Sales Revenue $ 2,500,000 $ 525,000 Cost of Goods Sold (1,750,000) (345,000) Gross Profit 750,000 180,000 Operating Expenses (475,000) (102,500) Income (loss) from Subsidiary 57,500 Net Income $ 332,500 $ 77,500

Explanation / Answer

Ans:

a. Schedule showing computation of income (loss) on subsidiary on the parent's pre-consolidation books for 2018

Sales revenue 525,000

Less: Cost of Goods sold 345,000

Gross Profit 180,000

Less: Operating Expeses 102,500

Net Income 77,500

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