Required by the equity method

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Reference no: EM131100003

Parent purchased Subsidiary on January 1, 2013. The excess of investment cost over book value was allocated as follows:

Equipment (20-year life) $110,000

Customer list (10-year life) 192,500

Patent (10-year life) 137,500

Goodwill 110,000

Total $550,000

Parent regularly sells merchandise to Subsidiary. In 2015, inter-company sales amounted to $48,070, with $14,253 of deferred profit remaining in ending inventory. Year-end inter-company receivables/payables amounted to $14,560.

In 2016, inter-company sales amounted to $74,800 with $21,318 of deferred profit remaining in ending inventory. Year-end inter-company receivables/payables amounted to $29,920.

Financial statements of Parent and Subsidiary for the year ended December 31, 2016 are presented below.


Parent

Subsidiary

Sales revenue

$4,807,000

$ 1,722,600

Cost of goods sold

(3,364,900)

(1,033,560)

Gross profit

1,442,100

689,040

Operating expenses

(913,030)

(447,876)

Equity income

195,599

_

Net Income

$ 724,669

$ 241,164




Retained Earnings, 1/1/16

$2,415,037

$ 890,010

Net income

724,669

241,164

Dividends

(138,780)

(31,352)

Retained Earnings, 12/31/16

$3,000,926

$ 1,099,822




Cash and receivables

$1,345,251

$ 956,434

Inventory

932,558

513,334

Equity investment

1,732,894


Property, plant & equipment (Net)

4,485,892

949,728

Total Assets

$8,496,595

$2,419,496




Accounts payable

$ 639,306

$ 205,608

Accrued liabilities

722,813

281,476

Notes payable

2,750,000

574,200

Common stock

785,945

114,840

Additional paid-in capital

597,605

143,550

Retained Earnings, 12/31/16

3,000,926

1,099,822

Total Liabilities and Equities

$8,496,595

$2,419,496

Required:

a. Prepare the 2016 journal entries, required by the equity method, on Parent's books.

b. Prepare the consolidation entries for 2016.

Reference no: EM131100003

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