ADVANCED ACCOUNTING
ADVANCED ACCOUNTING
4th Edition
ISBN: 9781618533128
Author: Halsey
Publisher: Cambridge Business Publishers
Question
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Chapter 4, Problem 54P

a.

To determine

Prepare the journal entries made by the parent to record the sale of the equipment to the subsidiary; and by the subsidiary to record the purchase and the [I] entries for the year of sale.

a.

Expert Solution
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Explanation of Solution

An acquisition of assets is the purchase of a corporation by purchasing its assets rather than its stock. An acquisition is when one company acquires most or all of the shares of another company to gain control over that company. An investment in equity is money which is invested in a company by buying that company's shares in the stock market. Typically, those shares are traded in a stock exchange.

The required journal entry recorded by the parent is as follows:

DateAccount title and ExplanationPost RefDebit ($)Credit ($)
 Cash $89,100 
 Accumulated depreciation $14,400 
 Equipment  $86,400
 Gain on sale of Equipment  $17,100
 

(To record the sale of equipment)

   

Table (1)

The required journal entry recorded by the subsidiary is as follows:

DateAccount title and ExplanationPost RefDebit ($)Credit ($)
 Equipment $89,100 
          Cash  $89,100
 

(To record the purchase of equipment)

   
     
 [Igain] Gain on sale of equipment $17,100 
 Equipment  $2,700
 Accumulated depreciation  $14,400
 

(To adjust Gain, Equipment, and Accumulated Depreciation on the date of the intercompany transfer of equipment – given that the transaction occurred at the beginning of the year, usage of the equipment for the year must be reflected in a separate entry)

   
     
 [Idep] PPE, net $1,710 
 Depreciation Expense  $1,710
 (To eliminate the excess depreciation expense recorded by the parent, and to adjust accumulated depreciation from the BOY amount to the EOY amount)   

Table (1)

Working notes:

In January of 2017, the parent sold Equipment to the subsidiary for a cash price of $89,100. The subsidiary retained the depreciation policy of the parent and depreciates the equipment over its remaining 10-year useful life.

Depreciation charged by the subsidiary on equipment is $89,100/10 i.e., $8,910

The parent had acquired the equipment at a cost of $86,400 and depreciated the equipment over its 12-year useful life using the straight-line method.

Depreciation charged by the parent on equipment is $86,400/12 i.e., $7,200.

Calculate excess depreciation:

Excess Depreciation=$8,910$7,200=$1,710

b.

To determine

Compute the remaining portion of the deferred gain on January 1, 2019.

b.

Expert Solution
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Explanation of Solution

The portion of gain noticed on a property exchange that is not currently taxed. The gain is generally taxed when the property acquired in the exchange is sold. An exchange of property that is not currently taxed is part of the realized gain. The gain is generally taxed at the time of sale of the property acquired at the exchange.

In January of 2017, the parent sold Equipment to the subsidiary for a cash price of $89,100. The subsidiary retained the depreciation policy of the parent and depreciates the equipment over its remaining 10-year useful life.

Depreciation charged by the subsidiary on equipment is $89,100/10 i.e., $8,910

The parent had acquired the equipment at a cost of $86,400 and depreciated the equipment over its 12-year useful life using the straight-line method.

Depreciation charged by the parent on equipment is $86,400/12 i.e., $7,200.

Calculate excess depreciation:

Excess Depreciation=$8,910$7,200=$1,710

Operating expenses of the subsidiary is $72,000

Gain on the sale of equipment is $17,100

Through the BOY, two years have passed, so the deferred gain at the start of the current year is as follows:

Deferred gain=$17,1002×$1,710=$13,680

Hence, the remaining portion of the deferred gain on Jan 1, 2019 is $13,680.

c.

To determine

Compute the amount of net income (loss) from subsidiary reported by the parent company for the year ended Dec 31, 2019 assuming that the parent applied the equity method.

c.

Expert Solution
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Explanation of Solution

Equity income is money generated from stock dividends that investors can access by buying dividend-declared stocks or by buying funds that invest in dividend-declared stocks.

Subsidiary net income is $67,500

AAP Depreciation is $13,500

Deferred gain on intercompany sale is $1,710

The computation to yield the income (loss) from subsidiary reported by the parent company during 2019 is as follows:

ParticularsAmount ($)
Subsidiary net income$67,500
AAP Depreciation($13,500)
Deferred gain on intercompany sale($1,710)
Income (loss) from subsidiary$55,710

Table (1)

Hence, the income (loss) from subsidiary is $55,710.

d.

To determine

Compute the equity investment account balance on Dec 31, 2019.

d.

Expert Solution
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Explanation of Solution

An investment in equity is money which is invested in a company by buying that company's shares in the stock market. Typically, those shares are traded in a stock exchange.

EOY retained earnings of subsidiary is $261,000

EOY Common stock of subsidiary is $270,000.

Calculate EOY Unamortized AAP assets:

ParticularsAmount ($)Dep./Amort.Amount
PPE, net$45,0005×$4,500=$22,500$22,500
Patent$72,0005×$9,000=$45,000$27,000
Goodwill$81,000 $81,000
EOY AAP assets$207,000__$13,500__$130,500__

The computation to yield the Equity Investment balance on Dec 31, 2019 is as follows:

ParticularsAmount ($)

EOY subsidiary retained earnings

$261,000
EOY subsidiary common stock$270,000
Add: Unamortized AAP @ EOY$130,500
Less: Unconfirmed gain @ EOY$11,970
EOY Equity investment balance$649,530

Table (1)

Hence, the equity investment balance as on Dec 31, 2019 is $649,530

e.

To determine

Prepare the consolidation entries for the year ended Dec 31, 2019.

e.

Expert Solution
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Explanation of Solution

Consolidated financial statements are a group of entities financial statements that are presented as those of a single economic entity. They are the financial statements of a group in which the parent company and its subsidiaries introduce their assets, liabilities, equity, revenue, expenses and cash flows as those of a single business organization.

Consolidated accounting is used to club a parent company's financial information and one or more subsidiaries. The parent prepares consolidated financial statements through adjustment of entries and elimination of transactions between companies.

The computation of BOY [ADJ] for 2019 consolidation is as follows:

ParticularsAmount ($)

Change in retained earnings (S) thru BOY

$126,000
Cumulative AAP amort thru BOY$63,000
Less: BOY Downstream Unconf Asset$13,680
ADJ Amount$49,320

Table (1)

The required consolidation journal entries are as follows:

DateAccount title and ExplanationPost RefDebit ($)Credit ($)
 [ADJ] BOY Equity Investment $49,320 
 BOY Retained Earnings (P)  $49,320
     
 [C] Income (loss) from subsidiary $31,500 
 Dividends  $31,500
     
 [E]  Common Stock (S) @ BOY $270,000 
 Retained Earnings (S) @BOY $225,000 
 Equity Investment  $495,000
     
 [A]  PPE, net $27,000 
 Patent $36,000 
 Goodwill $81,000 
 Equity Investment @ BOY  $144,000
     
 [D  Depreciation and Amort. expenses $13,500 
 PPE, net  $4,500
 Patent  $9,000
 

(To record depreciation and amortization expense for the [A] assets)

   
     
 [Igain] Equity investment @BOY $13,680 
 PPE, net  $13,680
     
 [Idep] PPE, net $1,710 
 Depreciation Expense  $1,710

Table (1)

f.

To determine

Prepare the consolidation spreadsheet for the year ended December 31, 2019.

f.

Expert Solution
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Explanation of Solution

Consolidated financial statements are a group of entities financial statements that are presented as those of a single economic entity. They are the financial statements of a group in which the parent company and its subsidiaries introduce their assets, liabilities, equity, revenue, expenses and cash flows as those of a single business organization.

A consolidated balance sheet provides a parent company's assets and liabilities and all of its subsidiaries in a legal document, without any differentiation on which items pertain to which companies.

Consolidation worksheet is an instrument used to prepare a parent's consolidated financial statements and their subsidiaries. It demonstrates the individual book values of companies, the adjustments and eliminations necessary, and the consolidated final values.

The consolidated spreadsheet for the year ended December 31, 2019 is shown below:

      Elimination entries  
Income Statement Parent Subsidiary Dr Cr Consolidated
Sales$900,000$414,000]$1,314,000
Cost of goods sold(495,000) (252,000)(747,000)
Gross Profit405,000162,000567,000
Deprec. & amort. expense(27,000)(18,000)[D]13,500(56,790)
Operating Expenses       (270,000)(72,000)[Idep]1,710(342,000)
Interest Expense(13,500)(4,500)(18,000)
Total Expenses(310,500)(94,500)(416,790)
Income (loss) from subsidiary31,500[C]31,500
Net Income$126,000$67,500$150,210
  
Statement of Retained Earnings 
Beginning Retained Earnings$495,000$225,000[E]225,000[ADJ]49,320$544,320
Net Income126,00067,500150,210
Dividends       (103,500)(31,500)[C]31,500         (103,500)
Ending retained Earnings$517,500$261,000$591,030
  
Balance Sheet 
Assets 
Cash$81,000$54,000$135,000
Accounts receivable108,00081,000189,000
Inventory252,000126,000378,000
Equity investment576,000[ADJ]49,320[E]495,0000
[Igain]13,680[A]144,000
PPE, net306,000216,000[A]27,000[D]4,500532,530
[Idep]1,710[Igain]13,680
Other Assets117,000198,000315,000
Patent[A]36,000[D]9,00027,000
Goodwill[A]81,00081,000
Total Assets$1,440,000$675,0001,657,530
  
Liabilities and Stockholder's Equity 
Accounts payable$225,000$48,600$273,600
Accrued liabilities22,50041,40063,900
Notes Payable135,00054,000189,000
Common stock540,000270,000[E]270,000540,000
Retained earnings517,500261,000591,030
  
Total liabilities and equity$1,440,000$675,000$748,710$748,710$1,657,530
        

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