Prepare consolidation spreadsheet for intercompany sale of equipmentCost method Assume that a parent company acquired a subsidiary on January 1, 2012 for $847,000. The purchase price was $314,000 in excess of the book value of the subsidiarys Stockholders Equity on the acquisition date. On the acquisition date, the subsidiarys stockholders equity was comprised of $390,000 of no-par common stock and $143,000 of retained earnings. The Acquisition Accounting Premium (AAP) was assigned as follows: an increase of $18,000 in accounts receivable that were entirely collected during the year after acquisition, an increase of $65,000 for property, plant and equipment that has 10 years of remaining useful life, $109,000 for an unrecorded patent with an 8-year remaining life and $122,000 for goodwill. All amortizable components of the AAP are amortized using the straight-line method.

On January 1, 2014, the parent sold Equipment to the subsidiary for a cash price of $133,200. The parent had acquired the equipment at a cost of $129,300 and depreciated the equipment over its 12-year useful life using the straight-line method (no salvage value). The parent had depreciated the equipment for 2 years at the time of sale. The subsidiary retained the depreciation policy of the parent and depreciates the equipment over its remaining 10-year useful life.

Following are financial statements of the parent and its subsidiary as of December 31, 2016. The parent uses the cost method of pre-consolidation investment bookkeeping.

a. Prepare the journal entry that the parent made to record the sale of the equipment to the subsidiary, the journal entry that the subsidiary made to record the purchase, and the [I] entries for the year of sale.

Parent Parent Subsidiary $78,000 117,000 182,000 Income statement Sales Cost of goods sold Gross profit Deprec. & amort. Expense Operating expenses Interest expense Total expenses Income (loss) from subsidiary Net income $1,300,000 (715,000) 585,000 (39,000) (390,000) (19,500) (448,500) 45,500 $182,000 Subsidiary Balance sheet $598,000 Assets (364,000) Cash 234,000 Accounts receivable (26,000) Inventory (104,000) Equity investment (6,500) Property, plant & equipment (136,500) Other assets Total assets $97,500 Liabilities and stockholders' equity Accounts payable Accrued liabilities $325,000 Notes payable 97,500 Common stock (45,500) Retained earnings $377,000 Total liabilities and equity $117,000 156,000 364,000 847,000 442,000 169,000 2,095,000 312,000 286,000 $975,000 Statement of retained earnings BOY retained earnings $715,000 Net income 182,000 Dividends (149,500) Ending retained earnings $747,500 $325,000 32,500 195,000 795,000 747,500 2,095,000 $70,200 59,800 78,000 390,000 377,000 $975,000 Credit Parent General Journal Description Debit Cash 133,200 Accumulated depreciation 20,300 x Gain on sale of equipment 0 Equipment 0 To record sale of equipment 0 24,200 x 129,300 Credit Subsidiary General Journal Description Debit Equipment 133,200 Cash 0 To record purchase of equipment. 133,200 Credit Consolidation Journal Description Debit [lgain] Gain on sale of equipment 24,200 x Equipment 0 Accumulated depreciation 0 [ldep] Accumulated depreciation 2,545 Depreciation expense 0 3,900 20,300 x 0 2,420 x b. Compute the remaining portion of the deferred gain at January 1, 2016. $ 19,110 X c. Prior to preparing consolidated financial statements, compute the amount of equity income the parent would have reported for the year ended December 31, 2016 assuming the parent applied the equity method instead of the cost method of pre-consolidation bookkeeping. $ 80,545 X d. Prior to preparing consolidated financial statements, compute the amount of Equity investment the parent would have reported on December 31, 2016 assuming the parent applied the equity method instead of the cost method of pre-consolidation bookkeeping. Do not use negative signs with your answers below. Equity Investment ("as if" Equity Method) Common Stock (5) @ EOY 390,000 Retained Earnings (s) @ EOY 377,000 Add: Unamortized AAP @ EOY 149,500 x Deduct: Unconfirmed gain @ EOY 17,290 x EOY Investment ("as if" equity method) 899,210 x $ $ e. Prepare the consolidation entries for the year ended December 31, 2016. Consolidation Journal Description Debit Credit [AD]] 0 x 0 0 x [C] 0 x 0 X 0 X 0 OX [E] BOY Common stock (Subsidiary) 0 0X OX 0 X X 0 0 X [A] PPE, net 0 X 0 Patent 0 X 0 0 0 x 0 0 X X X X X [D] OX 0 0 0 X Patent 0 0 X [lgain] x 0 X 0 0 0 X [ldep] X X X OX 0 0 0 x f. Prepare the consolidation spreadsheet for the year ended December 31, 2016. Use negative signs with your answers in the Consolidated column for: Cost of goods sold, all expenses (inc. Total expenses) and Dividends. Consolidation Worksheet Parent Subsidiary Debit Credit Consolidated Income statement Sales $1,300,000 $598,000 $ 0x Cost of goods sold (715,000) (364,000) OX Gross profit 585,000 234,000 Deprec. & amort. expense (39,000) (26,000) [D] OX 0 x [ldep] 0 X Operating expenses (390,000) (104,000) 0 x Interest expense (19,500) (6,500) 0 x Total Expenses (448,500) (136,500) 0 x Income (loss) from subsidiary 45,500 [C] Ox 0 Net income $182,000 $97,500 $ $ 0 x Retained earnings statement: BOY retained earnings $715,000 $325,000 [E] 0 x 0X [AD]] $ OX Net income 182,000 97,500 0 X Dividends (149,500) (45,500) 0 X [C] 0 X $747,500 Ending retained earnings $377,000 $ $ 0 X Balance sheet: Assets Cash Accounts receivable Inventory Equity investment $117,000 156,000 364,000 847,000 $78,000 117,000 182,000 0 X 0X 0 x 0 0 X PPE, net [AD] [lgain] [A] [ldep] 312,000 0 X [E] 0 X [A] OX [D] 0 x [lgain] 442,000 0 X OX 0 X 169,000 286,000 0 X 0 X 0 X [D] 0 X [A] [A] 0 x 0 X 2,095,000 $975,000 $ 0 X Other assets Patent Goodwill Total assets Liabilities & stockholders' equity Accounts payable Accrued liabilities Notes payable Common stock EOY Retained earnings Total liabilities and equity $ 0X 0 x 0 X $325,000 32,500 195,000 795,000 747,500 $2,095,000 $70,200 59,800 78,000 390,000 377,000 $975,000 0 X OX 0 X $ 0 X $ 0 X $ 0 x Parent Parent Subsidiary $78,000 117,000 182,000 Income statement Sales Cost of goods sold Gross profit Deprec. & amort. Expense Operating expenses Interest expense Total expenses Income (loss) from subsidiary Net income $1,300,000 (715,000) 585,000 (39,000) (390,000) (19,500) (448,500) 45,500 $182,000 Subsidiary Balance sheet $598,000 Assets (364,000) Cash 234,000 Accounts receivable (26,000) Inventory (104,000) Equity investment (6,500) Property, plant & equipment (136,500) Other assets Total assets $97,500 Liabilities and stockholders' equity Accounts payable Accrued liabilities $325,000 Notes payable 97,500 Common stock (45,500) Retained earnings $377,000 Total liabilities and equity $117,000 156,000 364,000 847,000 442,000 169,000 2,095,000 312,000 286,000 $975,000 Statement of retained earnings BOY retained earnings $715,000 Net income 182,000 Dividends (149,500) Ending retained earnings $747,500 $325,000 32,500 195,000 795,000 747,500 2,095,000 $70,200 59,800 78,000 390,000 377,000 $975,000 Credit Parent General Journal Description Debit Cash 133,200 Accumulated depreciation 20,300 x Gain on sale of equipment 0 Equipment 0 To record sale of equipment 0 24,200 x 129,300 Credit Subsidiary General Journal Description Debit Equipment 133,200 Cash 0 To record purchase of equipment. 133,200 Credit Consolidation Journal Description Debit [lgain] Gain on sale of equipment 24,200 x Equipment 0 Accumulated depreciation 0 [ldep] Accumulated depreciation 2,545 Depreciation expense 0 3,900 20,300 x 0 2,420 x b. Compute the remaining portion of the deferred gain at January 1, 2016. $ 19,110 X c. Prior to preparing consolidated financial statements, compute the amount of equity income the parent would have reported for the year ended December 31, 2016 assuming the parent applied the equity method instead of the cost method of pre-consolidation bookkeeping. $ 80,545 X d. Prior to preparing consolidated financial statements, compute the amount of Equity investment the parent would have reported on December 31, 2016 assuming the parent applied the equity method instead of the cost method of pre-consolidation bookkeeping. Do not use negative signs with your answers below. Equity Investment ("as if" Equity Method) Common Stock (5) @ EOY 390,000 Retained Earnings (s) @ EOY 377,000 Add: Unamortized AAP @ EOY 149,500 x Deduct: Unconfirmed gain @ EOY 17,290 x EOY Investment ("as if" equity method) 899,210 x $ $ e. Prepare the consolidation entries for the year ended December 31, 2016. Consolidation Journal Description Debit Credit [AD]] 0 x 0 0 x [C] 0 x 0 X 0 X 0 OX [E] BOY Common stock (Subsidiary) 0 0X OX 0 X X 0 0 X [A] PPE, net 0 X 0 Patent 0 X 0 0 0 x 0 0 X X X X X [D] OX 0 0 0 X Patent 0 0 X [lgain] x 0 X 0 0 0 X [ldep] X X X OX 0 0 0 x f. Prepare the consolidation spreadsheet for the year ended December 31, 2016. Use negative signs with your answers in the Consolidated column for: Cost of goods sold, all expenses (inc. Total expenses) and Dividends. Consolidation Worksheet Parent Subsidiary Debit Credit Consolidated Income statement Sales $1,300,000 $598,000 $ 0x Cost of goods sold (715,000) (364,000) OX Gross profit 585,000 234,000 Deprec. & amort. expense (39,000) (26,000) [D] OX 0 x [ldep] 0 X Operating expenses (390,000) (104,000) 0 x Interest expense (19,500) (6,500) 0 x Total Expenses (448,500) (136,500) 0 x Income (loss) from subsidiary 45,500 [C] Ox 0 Net income $182,000 $97,500 $ $ 0 x Retained earnings statement: BOY retained earnings $715,000 $325,000 [E] 0 x 0X [AD]] $ OX Net income 182,000 97,500 0 X Dividends (149,500) (45,500) 0 X [C] 0 X $747,500 Ending retained earnings $377,000 $ $ 0 X Balance sheet: Assets Cash Accounts receivable Inventory Equity investment $117,000 156,000 364,000 847,000 $78,000 117,000 182,000 0 X 0X 0 x 0 0 X PPE, net [AD] [lgain] [A] [ldep] 312,000 0 X [E] 0 X [A] OX [D] 0 x [lgain] 442,000 0 X OX 0 X 169,000 286,000 0 X 0 X 0 X [D] 0 X [A] [A] 0 x 0 X 2,095,000 $975,000 $ 0 X Other assets Patent Goodwill Total assets Liabilities & stockholders' equity Accounts payable Accrued liabilities Notes payable Common stock EOY Retained earnings Total liabilities and equity $ 0X 0 x 0 X $325,000 32,500 195,000 795,000 747,500 $2,095,000 $70,200 59,800 78,000 390,000 377,000 $975,000 0 X OX 0 X $ 0 X $ 0 X $ 0 x