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 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 Retained Earnings, 1/1/18 $ 840,700 $ 245,650 Net Income 332,500 77,500 Dividends (52,900)    Retained Earnings, 12/31/18 $1,120,300 $ 314,300 Cash and Receivables $ 320,100 $ 178,200 Inventory 461,700 278,600 Equity Investment 625,400 PP&E Net 1,496,500 321,700 Total Assets $2,903,700 $ 778,500   Accounts Payable $ 182,400 $ 55,900 Accrued Liabilities 205,300 70,200 Notes Payable 810,000 212,000 Common Stock 354,200 45,000 Additional Paid-in Capital 231,500 81,100 Retained Earnings, 12/31/18 1,120,300 314,300 Total Liabilities and Equities $2,903,700 $ 778,500

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.

Explanation / Answer

Computation of Income or loss from subsidary on pre consolidation books -

Net income of Subsidary -77500

Parent's share -74%

Income or loss to parent -57500

Computation of Equity Investment

Total Assets 778500

Accounts Payable 55900

Accrued Liabilities 70200

Notes Payable 212000

Equity Investment 440400

Share of Parent -74% 325896

Consolidation Entries

Subsidary a/c dr 325896

Patent in subsidary a/c dr 200000

Goodwill in subsidary a/c dr 100000

To cash A/c 625896

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