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Acquisition of Subsidiary Assignment | Top Universities

Consolidation at the end of the first year subsequent to the date of acquisition—Equity method (purchase price equals book value)

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Assume that a parent company acquires its subsidiary on January 1, 2016, by exchanging 40,000 shares of its $1 par value Common Stock, with a market value on the acquisition date of $29 per share, for all of the outstanding voting shares of the acquiree. You have been charged with preparing the consolidation of these two companies at the end of the first year.
On the acquisition date, all of the subsidiary's assets and liabilities had fair values equaling their book values. The following are financial statements of the parent and its subsidiary for the year ended December 31, 2016.

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Parent Subsidiary Parent Subsidiary
Income statement Balance sheet
Sales $ 2,960,000 $ 1,685,000 Assets
Cost of goods sold (2,072,000) (1,008,000) Cash $ 706,920 $ 432,880
Gross profit 888,000 677,000 Accounts receivable 378,880 429,760
Equity income 240,200 Inventory 574,240 500,640
Operating expenses (562,400) (436,800) Equity investment 1,359,920
Net income $ 565,800 $ 240,200 Property, plant & equipment 2,170,240 926,240
Statement of retained earnings $ 5,190,200 $ 2,289,520
BOY retained earnings 1,881,600 868,000 Liabilities and stockholders' equity
Net income 565,800 240,200 Accounts payable $ 216,640 $ 160,160
Dividends (112,160) (40,280) Accrued liabilities 257,520 209,440
Ending retained earnings $ 2,335,240 $ 1,067,920 Long-term liabilities 560,000
Common stock 414,400 112,000
APIC 1,966,400 180,000
Retained earnings 2,335,240 1,067,920
$ 5,190,200 $ 2,289,520

a. Prepare the journal entry to record the acquisition of the subsidiary.

General Journal
Description Debit Credit
AnswerCommon stockDividendsEquity income equity investment retained earnings Answer Answer
AnswerCommon stockDividendsEquity income equity investmentRetained earnings Answer Answer
Additional paid in capital Answer Answer

b. Show the computations to yield the Equity Investment reported by the parent in the amount of $1,359,920.
Do not use negative signs with your answers.

Equity investment at 1/1/16 Answer
AnswerCommon stockDividendsEquity incomeEquity investmentRetained earnings Answer
AnswerCommon stockDividendsEquity incomeEquity investmentRetained earnings Answer
Equity investment at 12/31/16 Answer

c. Prepare the consolidation entries for the year ended December 31, 2016.

Consolidation Journal
Description Debit Credit
[C] AnswerCommon stockDividendsEquity incomeEquity investmentRetained earnings Answer Answer
AnswerCommon stockDividendsEquity incomeEquity investmentRetained earnings Answer Answer
Equity investment Answer Answer
[E] Common stock Answer Answer
APIC Answer Answer
AnswerCommon stockDividendsEquity incomeEquity investmentRetained earnings Answer Answer
AnswerCommon stockDividendsEquity incomeEquity investmentRetained earnings Answer Answer

d. Prepare the consolidated spreadsheet for the year ended December 31, 2016.
Use negative signs with answers in the Consolidated column for reductions (Cost of goods sold, Operating expenses and Dividends).

Consolidation Worksheet
Parent Subsidiary Dr Cr Consolidated
Income statement:
Sales $2,960,000 $1,685,000 Answer
Cost of goods sold (2,072,000) (1,008,000) Answer
Gross profit 888,000 677,000 Answer
Equity income 240,200 [C] Answer Answer
Operating expenses (562,400) (436,800) Answer
Net income $565,800 $240,200 Answer
Statement of retained earnings:
BOY retained earnings $1,881,600 $868,000 [E] Answer Answer
Net income 565,800 240,200 Answer
Dividends (112,160) (40,280) Answer [C] Answer
Ending retained earnings $2,335,240 $1,067,920 Answer
Balance sheet:
Assets
Cash $706,920 $432,880 Answer
Accounts receivable 378,880 429,760 Answer
Inventory 574,240 500,640 Answer
Equity investment 1,359,920 Answer [C] Answer
Answer [E]
Property, plant and equipment (PPE), net 2,170,240 926,240 Answer
$5,190,200 $2,289,520 Answer
Liabilities and stockholders' equity
Accounts payable $216,640 $160,160 Answer
Accrued liabilities 257,520 209,440 Answer
Long-term liabilities 560,000 Answer
Common stock 414,400 112,000 [E] Answer Answer
APIC 1,966,400 180,000 [E] Answer Answer
Retained earnings 2,335,240 1,067,920 Answer
$5,190,200 $2,289,520 Answer Answer Answer

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