Chapter 4, Problem 54P

a.

To determine

Prepare the journal entries made by the parent to record the sale of the equipment to the subsidiary; and by the subsidiary to record the purchase and the [I] entries for the year of sale.

Explanation of Solution

An acquisition of assets is the purchase of a corporation by purchasing its assets rather than its stock. An acquisition is when one company acquires most or all of the shares of another company to gain control over that company. 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 required journal entry recorded by the parent is as follows:

Date	Account title and Explanation	Post Ref	Debit ($)	Credit ($)
	Cash		$\$89,100$
	Accumulated depreciation		$\$14,400$
	Equipment			$\$86,400$
	Gain on sale of Equipment			$\$17,100$
	(To record the sale of equipment)

Table (1)

The required journal entry recorded by the subsidiary is as follows:

Date	Account title and Explanation	Post Ref	Debit ($)	Credit ($)
	Equipment		$\$89,100$
	Cash			$\$89,100$
	(To record the purchase of equipment)
	[Igain] Gain on sale of equipment		$\$17,100$
	Equipment			$\$2,700$
	Accumulated depreciation			$\$14,400$
	(To adjust Gain, Equipment, and Accumulated Depreciation on the date of the intercompany transfer of equipment – given that the transaction occurred at the beginning of the year, usage of the equipment for the year must be reflected in a separate entry)
	[Idep] PPE, net		$\$1,710$
	Depreciation Expense			$\$1,710$
	(To eliminate the excess depreciation expense recorded by the parent, and to adjust accumulated depreciation from the BOY amount to the EOY amount)

Table (1)

Working notes:

In January of 2017, the parent sold Equipment to the subsidiary for a cash price of $89,100. The subsidiary retained the depreciation policy of the parent and depreciates the equipment over its remaining 10-year useful life.

Depreciation charged by the subsidiary on equipment is $89,100/10 i.e., $8,910

The parent had acquired the equipment at a cost of $86,400 and depreciated the equipment over its 12-year useful life using the straight-line method.

Depreciation charged by the parent on equipment is $86,400/12 i.e., $7,200.

Calculate excess depreciation:

$\begin{array}{c}\text{Excess Depreciation}=\$8,910-\$7,200\\ =\$1,710\end{array}$

b.

To determine

Compute the remaining portion of the deferred gain on January 1, 2019.

Explanation of Solution

The portion of gain noticed on a property exchange that is not currently taxed. The gain is generally taxed when the property acquired in the exchange is sold. An exchange of property that is not currently taxed is part of the realized gain. The gain is generally taxed at the time of sale of the property acquired at the exchange.

In January of 2017, the parent sold Equipment to the subsidiary for a cash price of $89,100. The subsidiary retained the depreciation policy of the parent and depreciates the equipment over its remaining 10-year useful life.

Depreciation charged by the subsidiary on equipment is $89,100/10 i.e., $8,910

The parent had acquired the equipment at a cost of $86,400 and depreciated the equipment over its 12-year useful life using the straight-line method.

Depreciation charged by the parent on equipment is $86,400/12 i.e., $7,200.

Calculate excess depreciation:

$\begin{array}{c}\text{Excess Depreciation}=\$8,910-\$7,200\\ =\$1,710\end{array}$

Operating expenses of the subsidiary is $\$72,000$

Gain on the sale of equipment is $\$17,100$

Through the BOY, two years have passed, so the deferred gain at the start of the current year is as follows:

$\begin{array}{c}\text{Deferred gain}=\$17,100-2\times \$1,710\\ =\$13,680\end{array}$

Hence, the remaining portion of the deferred gain on Jan 1, 2019 is $\$13,680$.

c.

To determine

Compute the amount of net income (loss) from subsidiary reported by the parent company for the year ended Dec 31, 2019 assuming that the parent applied the equity method.

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.

Subsidiary net income is $\$67,500$

AAP Depreciation is $\$13,500$

Deferred gain on intercompany sale is $\$1,710$

The computation to yield the income (loss) from subsidiary reported by the parent company during 2019 is as follows:

Particulars	Amount ($)
Subsidiary net income	$\$67,500$
AAP Depreciation	$(\$13,500)$
Deferred gain on intercompany sale	$(\$1,710)$
Income (loss) from subsidiary	$\$55,710$

Table (1)

Hence, the income (loss) from subsidiary is $\$55,710$.

d.

To determine

Compute the equity investment account balance on Dec 31, 2019.

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.

EOY retained earnings of subsidiary is $\$261,000$

EOY Common stock of subsidiary is $\$270,000$.

Calculate EOY Unamortized AAP assets:

Particulars	Amount ($)	Dep./Amort.	Amount
PPE, net	$\$45,000$	$5\times \$4,500=\$22,500$	$\$22,500$
Patent	$\$72,000$	$5\times \$9,000=\$45,000$	$\$27,000$
Goodwill	$\$81,000$		$\$81,000$
EOY AAP assets	$\underset{\_}{\underset{\_}{\$207,000}}$	$\underset{\_}{\underset{\_}{\$13,500}}$	$\underset{\_}{\underset{\_}{\$130,500}}$

The computation to yield the Equity Investment balance on Dec 31, 2019 is as follows:

Particulars	Amount ($)
EOY subsidiary retained earnings	$\$261,000$
EOY subsidiary common stock	$\$270,000$
Add: Unamortized AAP @ EOY	$\$130,500$
Less: Unconfirmed gain @ EOY	$\$11,970$
EOY Equity investment balance	$\$649,530$

Table (1)

Hence, the equity investment balance as on Dec 31, 2019 is $\$649,530$

e.

To determine

Prepare the consolidation entries for the year ended Dec 31, 2019.

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 computation of BOY [ADJ] for 2019 consolidation is as follows:

Particulars	Amount ($)
Change in retained earnings (S) thru BOY	$\$126,000$
Cumulative AAP amort thru BOY	$\$63,000$
Less: BOY Downstream Unconf Asset	$\$13,680$
ADJ Amount	$\$49,320$

Table (1)

The required consolidation journal entries are as follows:

Date	Account title and Explanation	Post Ref	Debit ($)	Credit ($)
	[ADJ] BOY Equity Investment		$\$49,320$
	BOY Retained Earnings (P)			$\$49,320$
	[C] Income (loss) from subsidiary		$\$31,500$
	Dividends			$\$31,500$
	[E]  Common Stock (S) @ BOY		$\$270,000$
	Retained Earnings (S) @BOY		$\$225,000$
	Equity Investment			$\$495,000$
	[A]  PPE, net		$\$27,000$
	Patent		$\$36,000$
	Goodwill		$\$81,000$
	Equity Investment @ BOY			$\$144,000$
	[D  Depreciation and Amort. expenses		$\$13,500$
	PPE, net			$\$4,500$
	Patent			$\$9,000$
	(To record depreciation and amortization expense for the [A] assets)
	[Igain] Equity investment @BOY		$\$13,680$
	PPE, net			$\$13,680$
	[Idep] PPE, net		$\$1,710$
	Depreciation Expense			$\$1,710$

Table (1)

f.

To determine

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

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
Sales		$900,000		$414,000	]					$1,314,000
Cost of goods sold		(495,000)		(252,000)						(747,000)
Gross Profit		405,000		162,000						567,000
Deprec. & amort. expense		(27,000)		(18,000)	[D]	13,500				(56,790)
Operating Expenses		(270,000)		(72,000)			[Idep]	1,710		(342,000)
Interest Expense		(13,500)		(4,500)						(18,000)
Total Expenses		(310,500)		(94,500)						(416,790)
Income (loss) from subsidiary		31,500			[C]	31,500
Net Income		$126,000		$67,500						$150,210
Statement of Retained Earnings
Beginning Retained Earnings		$495,000		$225,000	[E]	225,000	[ADJ]	49,320		$544,320
Net Income		126,000		67,500						150,210
Dividends		(103,500)		(31,500)			[C]	31,500		(103,500)
Ending retained Earnings		$517,500		$261,000						$591,030
Balance Sheet
Assets
Cash		$81,000		$54,000						$135,000
Accounts receivable		108,000		81,000						189,000
Inventory		252,000		126,000						378,000
Equity investment		576,000			[ADJ]	49,320	[E]	495,000		0
					[Igain]	13,680	[A]	144,000
PPE, net		306,000		216,000	[A]	27,000	[D]	4,500		532,530
					[Idep]	1,710	[Igain]	13,680
Other Assets		117,000		198,000						315,000
Patent					[A]	36,000	[D]	9,000		27,000
Goodwill					[A]	81,000				81,000
Total Assets		$1,440,000		$675,000						1,657,530
Liabilities and Stockholder's Equity
Accounts payable		$225,000		$48,600						$273,600
Accrued liabilities		22,500		41,400						63,900
Notes Payable		135,000		54,000						189,000
Common stock		540,000		270,000	[E]	270,000				540,000
Retained earnings		517,500		261,000						591,030
Total liabilities and equity		$1,440,000		$675,000		$748,710		$748,710		$1,657,530