Parent purchased Subsidiary on January 1, 2014. The excess of investment cost ov

Question

Parent purchased Subsidiary on January 1, 2014. The excess of investment cost over book value of $210,000 was allocated entirely to a 10-year royalty agreement. Subsidiary regularly sells merchandise to Parent. In 2015, inter-company sales amounted to $123,960, with $27,558 of deferred profit remaining in ending inventory. Year-end inter-company receivables/payables amounted to $40,300. In 2016, inter-company sales amounted to $123,960 with $35,330 of deferred profit remaining in ending inventory. Year-end inter-company receivables/payables amounted to $49,584. Financial statements of Parent and Subsidiary for the year ended December 31, 2016 are presented below. Parent Subsidiary Sales revenue $ 9,864,000 $3,718,800 Cost of goods sold (6,904,800 ) (2,231,280 ) Gross profit 2,959,200 1,487,520 Operating expenses (1,874,160 ) (966,888 ) Equity income 491,860 _________ Net Income $ 1,576,900 $ 520,632 Retained Earnings, 1/1/16 $ 4,955,674 $1,921,380 Net income 1,576,900 520,632 Dividends (301,758 ) (67,682 ) Retained Earnings, 12/31/16 $ 6,230,816 $2,374,330 Cash and receivables $ 2,557,242 $2,064,790 Inventory 1,913,616 1,108,202 Equity investment 3,043,826 Property, plant & equipment (Net) 9,205,085 2,050,300 Total Assets $16,719,769 $5,223,292 Accounts payable $ 1,341,706 $ 443,876 Accrued liabilities 1,513,051 607,660 Notes payable 4,200,000 1,239,600 Common stock 1,612,764 125,280 Additional paid-in capital 1,821,432 432,546 Retained Earnings, 12/31/16 6,230,816 2,374,330 Total Liabilities and Equities $16,719,769 $5,223,292 Required: a. Prepare a schedule showing the computation of Equity Income on Parent's books for 2016. b. Prepare a schedule showing the computation of Equity Investment on Parent's books at December 31, 2016. c. Prepare the consolidation worksheet with entries for 2016.

Explanation / Answer

a) since Parent owns subsidary 100%, all profits will be attributable to Parent

Net income of subsidary = 520632

Add: profits in opening inventory realised during year = 27558

Less: Profits in closing inventory unrealised during year = 35330

Less: amortisation of royalty , 210000 / 10 = 21000

= equity income = 491860

c) consolidated balance sheet of parent will be

Cash & receivables and accounts payable ahve been reduced by common amount of 49584

Inventory has been reduced for unrealised loss of 35330

Parent Subsidary Parent consolidated Parent Subsidary Parent consolidated Retained Earnings 6230816 2374330 6230816 Cash & Receivables 2557242 2064790 4572448 Accounts Payable 1341706 443876 1735998 Inventory 1913616 1108202 2986488 Accrued Liabilities 1513051 607660 2120711 PPE 9205085 2050300 11255385 Notes Payable 4200000 1239600 5439600 Equity investment 3043826 Common stock 1612764 125280 1612764 Royalty 147000 Additional paid in capital 1821432 432546 1821432 Total 16719769 5223292 18961321 Total 16719769 5223292 18961321

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