Answered: dation spreadsheet for continuous sale…

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter8: Investing Activities

Section: Chapter Questions

Problem 23PC

See similar textbooks

Related questions

Concept explainers

Question

100%

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:

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

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:

	Inventory Sales	Gross Profit Remaining in Unsold Inventory	Receivable (Payable)
2016	$68,000	$19,380	$27,200
2015	$43,700	$12,597	$13,237

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.


Plus:
Less:
AAP depreciation
	Income (loss) from subsidiary

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.

Common stock
APIC
Retained earnings
BOY unamortized AAP
BOY deferred profit
Income (loss) from subsidiary
Dividends
Equity investment

c. Prepare the consolidation entries for the year ended December 31, 2016.

Consolidation Worksheet
Description	Debit	Credit
[C]
	Dividends

[E]	Common stock
	APIC


[A]	PPE net
	Customer list
	Royalty agreement


[D]
	PPE net
	Customer list

[Icogs]

	To recognize deferred profit on prior year's sale.
[Isales]

[Icogs]

	To defer gross profit on the intercompany sale.
[Ipay]

d. Prepare the consolidation spreadsheet for the year ended December 31, 2016. Hint: Use negative signs with answers when appropriate.

	Elimination Entries
	Parent	Sub		Dr	Cr		Consolidated
Income statement:
Sales	$4,370,000	$783,000	[Isales]
Cost of goods sold	(3,059,000)	(469,800)	[Icogs]			[Icogs]
						[Isales]
Gross profit	1,311,000	313,200
Income (loss) from subsidiary	67,837		[C]
Operating expenses	(830,300)	(203,580)	[D]
Net income	$548,537	$109,620
Statement of retained earnings:
BOY retained earnings	$2,195,488	$404,550	[E]
Net income	548,537	109,620
Dividends	(126,164)	(14,251)				[C]
EOY retained earnings	$2,617,861	$499,919
Balance sheet:
Assets
Cash	$650,639	$253,087
Accounts receivable	559,360	181,656				[Ipay]
Inventory	847,780	233,334				[Icogs]
PPE, net	4,078,084	431,694	[A]			[D]
Customer List			[A]			[D]
Royalty agreement			[A]			[D]
Goodwill			[A]
Equity investment	957,989		[Icogs]			[C]
						[E]
						[A]
	$7,093,852	$1,099,771
Liabilities and stockholders’ equity
Accounts payable	$327,313	$93,459	[Ipay]
Other current liabilities	403,228	127,943
Long-term liabilities	2,500,000	261,000
Common stock	714,495	52,200	[E]
APIC	530,955	65,250	[E]
Retained earnings	2,617,861	499,919
	$7,093,852	$1,099,771

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.