Parent acquired Subsidiary on January 2, 2015, at a price $250,000 in excess of

Question

Parent acquired Subsidiary on January 2, 2015, at a price $250,000 in excess of book value. Of that excess, $170,000 was allocated to an unrecorded Customer List with a 10-year life, with the remainder to Goodwill. The parent uses the equity method to account for its investment in its subsidiary.

On January 2, 2018, Subsidiary sold equipment to Parent for $80,000. The equipment had a cost of $90,000 and accumulated depreciation of $37,000. The remaining life of the equipment was estimated at 6 years. Financial statements for the two companies for the year ended December 31, 2019, are presented below.

Required:

a. Prepare the journal entries on the books of Parent and Subsidiary to record the equipment sale.

b. Compute the amount of unrealized gain at January 1, 2019.

c. Prepare entries required under the equity method on Parent's pre-consolidation books for 2019.

d. Prepare the consolidation entries for 2019.  

Parent Subsidiary Sales Revenue $ 6,500,000 $ 2,000,000 Cost of Goods Sold (4,800,000) (1,200,000) Gross Profit 1,700,000 800,000 Operating Expenses (840,000) (470,000) Income (loss) from Subsidiary 317,500 Net Income $ 1,177,500 $ 330,000

Explanation / Answer

Solution(a): Following are the required journal entries:

Solution(b): Calculation of unrealised gain:

Solution (c): Following are the required journal entries (under equity method):

Notes: Amortization = 170,000/10 = $17,000

Solution(d): Following are the required journal entries for 2019:

Particulars Amount($) Debit Amount($) Credit Cash A/c 80,000 Accumulated depreciation A/C 37,000 Equipment A/C 90,000 Gain on sale A/C 27,000 (To record sale of equipment on subsidiary books) Equipment A/C 80,000 Cash A/C 80,000 (To record equipment Purchased by parent)

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.