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.
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Parent
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Subsidiary
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Sales revenue
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$4,807,000
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$ 1,722,600
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Cost of goods sold
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(3,364,900)
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(1,033,560)
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Gross profit
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1,442,100
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689,040
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Operating expenses
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(913,030)
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(447,876)
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Equity income
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195,599
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_
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Net Income
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$ 724,669
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$ 241,164
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Retained Earnings, 1/1/16
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$2,415,037
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$ 890,010
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Net income
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724,669
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241,164
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Dividends
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(138,780)
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(31,352)
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Retained Earnings, 12/31/16
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$3,000,926
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$ 1,099,822
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Cash and receivables
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$1,345,251
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$ 956,434
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Inventory
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932,558
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513,334
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Equity investment
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1,732,894
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Property, plant & equipment (Net)
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4,485,892
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949,728
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Total Assets
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$8,496,595
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$2,419,496
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Accounts payable
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$ 639,306
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$ 205,608
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Accrued liabilities
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722,813
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281,476
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Notes payable
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2,750,000
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574,200
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Common stock
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785,945
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114,840
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Additional paid-in capital
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597,605
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143,550
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Retained Earnings, 12/31/16
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3,000,926
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1,099,822
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Total Liabilities and Equities
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$8,496,595
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$2,419,496
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Required:
a. Prepare the 2016 journal entries, required by the equity method, on Parent's books.
b. Prepare the consolidation entries for 2016.
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