Determining ending consolidated balances in the second year following the acquis

Question

Determining ending consolidated balances in the second year following the acquisition- Cost method Assume a parent company acquired a subsidiary on January 1, 2015, for $2,236,DDD. The purchase price was $1,116,2D0 in excess of the subsidiary's S1,119,BDD book value of Stockholders' Equity on the acquisition date. of this excess purchase price, $652,000 was assigned to Property, plant and equipment with a remaining economic useful life of 10 years, and $464,200 was assigned to Goodwill. On the acquisition date, the subsidiary reported retained eamings equal to $847,550. The parent uses the cost method of pre-consolidation Equity ivestment bookkeeping. The financial staements of the parent and its subsidiary far the year ended December 31, 2016, are as follows: Parent Subsidiary Parent Subsidiary Income statement Sales Cast o grods sold Gross profi Equity incorme Operating expenses Dalance sheet $8,318,75O $1,910,000 Assets 5,99,500) (1083,00 Cash 2,329,250 21,000 Acounts rece vable $1,567,280 $468,600 2462,900 421300 3,526,950 S40,8so 37 410 ,247(566,900 $1,118810 $254 100 nvenry Equity investment 2,236,000 Net inceme Property, plant&equipment 17,189.920 1,000,450 $26,982.950 2,431,000 Statement of retained carnings DOY retained earnings Nct incomC Dividends 5,0100 937,750 Liabiities and stackholders'equity ,88 254 Accounts payable 262,570) (37,400 Arued liabilities $1,217,920 173,130 1447,270 22,270 Ending retained camirgs $6,657 310 $1,154,450 Common stock APC Retained earnings 10,587,500 605,000 1,075,060 121.000 5997,890 5,250 6,657,310 1,15A450 $26,982,950 2,431,000

Explanation / Answer

Hi , how are you ?

a) Sales = 100 % of parent and subsidiary

= $1,0228,750 [8,318,750 +1,910,000]

b) Investment income = 0

While consolidating the financial statement the investment income and investment in subsidiary are not shown since its a transaction relate to group , intra group incomes , revenues are not included.

c) All incomes and expenses of parent and subsidiary consolidated to financial statement.

[1,247,840 + 566,900]

d) All asset and liability except intragroup are added 100%, so inventory is taken parent and subsidiary 100%

e) Equity investment relate to investment by parent to acquire shares in subsidiary , so it is a intra group items , so it is exclu

f) Proprty plant and equipment

Parent - 17,189,920

Subsidiary - 1,000,450

Fair value adjustment - 652,000

less depreciation on fairvalue - (65,200)

-------------------

closing balance 18,777,170

g) Goodwill

Purchase consideration = 2,236,000

less net asset at acquisition =(1,771,800)

--------------------------------------

goodwill 464,200

Note ;

net asset at acquisition net asset year end

Book value 1,119,800

fair value 652,000

opening balance 1,771,800

Fair value 652,000

net profit [254,100-37,400] 216,700   

less depreciation (65,200)

---------- -------------

1,771,800 2,575,300

h) Common stock

In case of common stock we take 100 % of parent only

  

i) Retained earnings

100% of parent retained earnings - 6,657,310

add profit to parent - 803,500

[2,575,300-1,771,800] notes

----------------------------

7,460,810

$ a Sales 10,228,750 b Investment income 0 c operatin expenses 1,814,740 d Inventory 4,067,500 e Equity investment 0 f Property plant and equipment 18,777,170 g Goodwill 464,200 h Common stock 1,075,060 i Retained earnings 7,460,810

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