ADVANCED ACCOUNTING
ADVANCED ACCOUNTING
4th Edition
ISBN: 9781618533128
Author: Halsey
Publisher: Cambridge Business Publishers
Question
Book Icon
Chapter 3, Problem 56P

a.

To determine

Explain how the parent company's pre-consolidation Investment Income for the

 year ended December 312019 is assessed.

a.

Expert Solution
Check Mark

Explanation of Solution

Equity income is money generated from stock dividends that investors can access by buying dividend-declared stocks or by buying funds that invest in dividend-declared stocks.

Investment income is revenue derived from interest payments, dividends, capital gains collected when a security or other resources are sold, and any other profits made through any kind of investment fund. Individuals usually earn most of their total net income annually through regular wage income. Under the cost method, parent’s company reported investment income for the year ended December 312019 is equal to the dividends of the subsidiary under the cost method. Hence, the parent company's reported Investment Income for the year ended December 31, 2019 is $50,000

b.

To determine

Explain how the parent company's reported Equity Investment balance as of December 31 2019 is assessed.

b.

Expert Solution
Check Mark

Explanation of Solution

An investment in equity is money which is invested in a company by buying that company's shares in the stock market. Typically, those shares are traded in a stock exchange. Under the cost method, that is the subsidiary's original purchase price. Hence, the parent company's reported Equity Investment balance as of December 312019 is $1,760,000

c.

To determine

Assess the retained earnings balance of the subsidiary as of the date of acquisition.

c.

Expert Solution
Check Mark

Explanation of Solution

Retained earnings (RE) is the part of the profit left over to the business after its shareholders have paid out dividends.

The computations to yield the retained earnings balance of the subsidiary as of the date of acquisition are as follows:

ParticularsAmount ($)

Investment balance (cost)

$1,760,000
Less: AAP on acquisition date$1,005,000

Less: Common stock (S) on acquisition date

$110,000

Less: APIC (S) on acquisition date

$140,000

Retained earnings (S) on acquisition date

$505,000

Table (1)

Working notes:

Equity Investment on the date of acquisition is $1,760,000

AAP on the acquisition date is $1,005,000

Common stock of subsidiary on the date of acquisition is $110,000.

APIC of subsidiary on the date of acquisition is $140,000.

Hence, the retained earnings balance of the subsidiary as of the date of acquisition is $505,000

d.

To determine

Compute the Equity Investment balance at December 312019.

d.

Expert Solution
Check Mark

Explanation of Solution

An investment in equity is money which is invested in a company by buying that company's shares in the stock market. Typically, those shares are traded in a stock exchange.

Using the equity method, Equity Investment would be equivalent to the book value of the shareholders' equity of the subsidiary plus the unamortized AAP balance:

ParticularsAmount ($)

EOY Book value of subsidiary’s Stockholders’ Equity

$1,250,000
EOY Unamortized balance of the AAP$845,000

EOY Equity Investment (Equity method)

$2,095,000

Table (1)

Working notes:

Common stock of the subsidiary is $110,000

APIC of the subsidiary is $140,000

Retained Earnings of the subsidiary is $1,000,000

AAP amortization on PPE (net) and patent is $40,000($15,000+$25,000)

EOY Unamortized balance of the AAP is ($1,005,000)($40,000×3)=$885,000

Hence, EOY Equity Investment (Equity method) is $2,095,000

e.

To determine

Prepare the [ADJ] entry necessary to bring Equity Investment from its current balance (using cost method) to the required balance on January 1, 2019 (using equity method).

e.

Expert Solution
Check Mark

Explanation of Solution

An investment in equity is money which is invested in a company by buying that company's shares in the stock market. Typically, those shares are traded in a stock exchange.

The consolidation journal entry [ADJ] increases the retained earnings of the parent's BOY to the balance which would have been reported if the parent used the equity method. The adjustment amount is equal to the change in the retained earnings of the subsidiary from the date of acquisition until the beginning of the consolidation year, adjusted for the cumulative AAP amortization that would have been recognized through the BOY.

Calculate the amount of adjustment:

[ADJ] is ($850,000$505,000)(3×$40,000)=$225,000

The [ADJ] entry necessary to bring Equity Investment from its current balance (using cost method) to the required balance on January 1, 2019 (using equity method) is as follows:

DateAccounting ExplanationAmount ($)Amount ($)
    
 Equity Investment$225,000 
 Retained Earnings (P) $225,000
 (to adjust the parent’s Retained Earnings to its proper balance under equity method)  

Table (1)

f.

To determine

Prepare the consolidation entries for the year ended December 312019.

f.

Expert Solution
Check Mark

Explanation of Solution

Consolidated financial statements are a group of entities financial statements that are presented as those of a single economic entity. They are the financial statements of a group in which the parent company and its subsidiaries introduce their assets, liabilities, equity, revenue, expenses and cash flows as those of a single business organization.

Consolidated accounting is used to club a parent company's financial information and one or more subsidiaries. The parent prepares consolidated financial statements through adjustment of entries and elimination of transactions between companies.

The required consolidation journal entries are as follows:

DateAccount title and ExplanationPost RefDebit ($)Credit ($)
 [C] Investment Income (P) $50,000 
 Dividends (S)  $50,000
 (To eliminate all changes in the Equity Investment account, leaving only beginning balance in the account. Note: no equity income since the parent uses the cost method.)   
     
 [E]  BOY Common Stock (S) $110,000 
        BOY APIC (S) $140,000 
 BOY Retained Earnings (S) $850,000 
 Equity Investment  $1,100,000
 

(To eliminate the portion of the investment account related to the book value of the subsidiary's stockholders' equity @ BOY)

   
     
 [A]  PPE, net (S) @ BOY $135,000 
        Patent (S) @ BOY $300,000 
        Goodwill (S) @ BOY $450,000 
 Equity Investment (P) @ BOY  $885,000
 

(To assign the remaining Equity Investment account (i.e., unamortized BOY AAP) to appropriate asset & liability accounts)

   
 [D] Operating expenses $40,000 
 PPE, net (S)  $15,000
 Patent (S)  $25,000
 

(To record depreciation and amortization expense for the [A] assets)

   
     
 

[I] No intercompany transactions

   

Table (1)

g.

To determine

Prepare the consolidation spreadsheet for the year ended December 31, 2019.

g.

Expert Solution
Check Mark

Explanation of Solution

Consolidated financial statements are a group of entities financial statements that are presented as those of a single economic entity. They are the financial statements of a group in which the parent company and its subsidiaries introduce their assets, liabilities, equity, revenue, expenses and cash flows as those of a single business organization.

A consolidated balance sheet provides a parent company's assets and liabilities and all of its subsidiaries in a legal document, without any differentiation on which items pertain to which companies.

Consolidation worksheet is an instrument used to prepare a parent's consolidated financial statements and their subsidiaries. It demonstrates the individual book values of companies, the adjustments and eliminations necessary, and the consolidated final values.

The consolidated spreadsheet for the year ended December 31, 2019 is shown below:

      Elimination entries  
Income Statement Parent Subsidiary Dr Cr Consolidated
Sales7,500,0001,600,0009,100,000
Cost of goods sold(5,400,000) (950,000)      (6,350,000)
Gross Profit2,100,000650,0002,750,000
Investment Income50,000[C]50,0000
Operating Expenses       (1,450,000)(450,000)[D]40,000(1,940,000)
Net Income700,000200,000810,000
  
Statement of Retained Earnings 
Beginning Retained Earnings2,230,000850,000[E]850,000[ADJ]225,0002,455,000
Net Income700,000200,000810,000
Dividends(230,000)(50,000)[C]50,000(230,000)
Ending retained Earnings2,700,0001,000,0003,035,000
  
Balance Sheet 
Assets 
Cash$740,000$420,000$1,160,000
Accounts receivable1,200,000380,0001,580,000
Inventory1,900,000490,0002,390,000
Equity investment1,760,000[ADJ]225,000[E]1,100,0000
[A]885,000
PPE, net4,000,000910,000[A]135,000[D]15,0005,030,000      
Patent[A]300,000[D]25,000275,000
Goodwill[A]450,000450,000
 $9,600,000$2,200,000$10,885,000
  
Liabilities and Stockholder's Equity 
Accounts payable900,000$140,0001,040,000
Accrued liabilities500,000260,000760,000
Long-term Liabilities2,600,000550,0003,150,000
Common stock700,000110,000[E]110,000700,000
APIC2,200,000140,000[E]140,0002,200,000
Retained earnings2,700,0001,000,0003,035,000
  
 $9,600,000$2,200,000$2,300,000$2,300,000$10,885,000
        

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Knowledge Booster
Background pattern image
Recommended textbooks for you
Text book image
FINANCIAL ACCOUNTING
Accounting
ISBN:9781259964947
Author:Libby
Publisher:MCG
Text book image
Accounting
Accounting
ISBN:9781337272094
Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:Cengage Learning,
Text book image
Accounting Information Systems
Accounting
ISBN:9781337619202
Author:Hall, James A.
Publisher:Cengage Learning,
Text book image
Horngren's Cost Accounting: A Managerial Emphasis...
Accounting
ISBN:9780134475585
Author:Srikant M. Datar, Madhav V. Rajan
Publisher:PEARSON
Text book image
Intermediate Accounting
Accounting
ISBN:9781259722660
Author:J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:McGraw-Hill Education
Text book image
Financial and Managerial Accounting
Accounting
ISBN:9781259726705
Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:McGraw-Hill Education