Acquisition of Subsidiary Assignment
Consolidation at the end of the first year subsequent to the 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 $29 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. The following are financial statements of the parent and its subsidiary for the year ended December 31, 2016.
| Parent | Subsidiary | Parent | Subsidiary | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Income statement | Balance sheet | ||||||||||||||||
| Sales | $ 2,960,000 | $ 1,685,000 | Assets | ||||||||||||||
| Cost of goods sold | (2,072,000) | (1,008,000) | Cash | $ 706,920 | $ 432,880 | ||||||||||||
| Gross profit | 888,000 | 677,000 | Accounts receivable | 378,880 | 429,760 | ||||||||||||
| Equity income | 240,200 | – | Inventory | 574,240 | 500,640 | ||||||||||||
| Operating expenses | (562,400) | (436,800) | Equity investment | 1,359,920 | – | ||||||||||||
| Net income | $ 565,800 | $ 240,200 | Property, plant & equipment | 2,170,240 | 926,240 | ||||||||||||
| Statement of retained earnings | $ 5,190,200 | $ 2,289,520 | |||||||||||||||
| BOY retained earnings | 1,881,600 | 868,000 | Liabilities and stockholders' equity | ||||||||||||||
| Net income | 565,800 | 240,200 | Accounts payable | $ 216,640 | $ 160,160 | ||||||||||||
| Dividends | (112,160) | (40,280) | Accrued liabilities | 257,520 | 209,440 | ||||||||||||
| Ending retained earnings | $ 2,335,240 | $ 1,067,920 | Long-term liabilities | – | 560,000 | ||||||||||||
| Common stock | 414,400 | 112,000 | |||||||||||||||
| APIC | 1,966,400 | 180,000 | |||||||||||||||
| Retained earnings | 2,335,240 | 1,067,920 | |||||||||||||||
| $ 5,190,200 | $ 2,289,520 | ||||||||||||||||
a. Prepare the journal entry to record the acquisition of the subsidiary.
| General Journal | ||
|---|---|---|
| Description | Debit | Credit |
| AnswerCommon stockDividendsEquity income equity investment retained earnings | Answer | Answer |
| AnswerCommon stockDividendsEquity income equity investmentRetained earnings | Answer | Answer |
| Additional paid in capital | Answer | Answer |
b. Show the computations to yield the Equity Investment reported by the parent in the amount of $1,359,920.
Do not use negative signs with your answers.
| Equity investment at 1/1/16 | Answer | |
| AnswerCommon stockDividendsEquity incomeEquity investmentRetained earnings | Answer | |
| AnswerCommon stockDividendsEquity incomeEquity investmentRetained earnings | Answer | |
| Equity investment at 12/31/16 | Answer |
c. Prepare the consolidation entries for the year ended December 31, 2016.
| Consolidation Journal | ||||||||
|---|---|---|---|---|---|---|---|---|
| Description | Debit | Credit | ||||||
| [C] | AnswerCommon stockDividendsEquity incomeEquity investmentRetained earnings | Answer | Answer | |||||
| AnswerCommon stockDividendsEquity incomeEquity investmentRetained earnings | Answer | Answer | ||||||
| Equity investment | Answer | Answer | ||||||
| [E] | Common stock | Answer | Answer | |||||
| APIC | Answer | Answer | ||||||
| AnswerCommon stockDividendsEquity incomeEquity investmentRetained earnings | Answer | Answer | ||||||
| AnswerCommon stockDividendsEquity incomeEquity investmentRetained earnings | Answer | Answer | ||||||
d. Prepare the consolidated spreadsheet for the year ended December 31, 2016.
Use negative signs with answers in the Consolidated column for reductions (Cost of goods sold, Operating expenses and Dividends).
| Consolidation Worksheet | |||||||
|---|---|---|---|---|---|---|---|
| Parent | Subsidiary | Dr | Cr | Consolidated | |||
| Income statement: | |||||||
| Sales | $2,960,000 | $1,685,000 | Answer | ||||
| Cost of goods sold | (2,072,000) | (1,008,000) | Answer | ||||
| Gross profit | 888,000 | 677,000 | Answer | ||||
| Equity income | 240,200 | [C] | Answer | Answer | |||
| Operating expenses | (562,400) | (436,800) | Answer | ||||
| Net income | $565,800 | $240,200 | Answer | ||||
| Statement of retained earnings: | |||||||
| BOY retained earnings | $1,881,600 | $868,000 | [E] | Answer | Answer | ||
| Net income | 565,800 | 240,200 | Answer | ||||
| Dividends | (112,160) | (40,280) | Answer | [C] | Answer | ||
| Ending retained earnings | $2,335,240 | $1,067,920 | Answer | ||||
| Balance sheet: | |||||||
| Assets | |||||||
| Cash | $706,920 | $432,880 | Answer | ||||
| Accounts receivable | 378,880 | 429,760 | Answer | ||||
| Inventory | 574,240 | 500,640 | Answer | ||||
| Equity investment | 1,359,920 | Answer | [C] | Answer | |||
| Answer | [E] | ||||||
| Property, plant and equipment (PPE), net | 2,170,240 | 926,240 | Answer | ||||
| $5,190,200 | $2,289,520 | Answer | |||||
| Liabilities and stockholders' equity | |||||||
| Accounts payable | $216,640 | $160,160 | Answer | ||||
| Accrued liabilities | 257,520 | 209,440 | Answer | ||||
| Long-term liabilities | – | 560,000 | Answer | ||||
| Common stock | 414,400 | 112,000 | [E] | Answer | Answer | ||
| APIC | 1,966,400 | 180,000 | [E] | Answer | Answer | ||
| Retained earnings | 2,335,240 | 1,067,920 | Answer | ||||
| $5,190,200 | $2,289,520 | Answer | Answer | Answer | |||
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