Chapter 4, Problem 56P

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.

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:

Date	Account title and Explanation	Post Ref	Debit ($)	Credit ($)
	Cash		$\$97,500$
	Accumulated depreciation		$\$37,500$
	Equipment			$\$112,500$
	Gain on sale of Equipment			$\$22,500$
	(To record the sale of equipment)

Table (1)

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

Date	Account title and Explanation	Post Ref	Debit ($)	Credit ($)
	Equipment		$\$97,500$
	Cash			$\$97,500$
	(To record the purchase of equipment)
	[Igain] Gain on sale of equipment		$\$22,500$
	Equipment		$\$15,000$
	Accumulated depreciation			$\$37,500$
	(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		$\$3,750$
	Depreciation Expense			$\$3,750$
	(To eliminate the excess depreciation expense recorded by the subsidiary, and to adjust accumulated depreciation from the BOY amount to the EOY amount)

Table (1)

Working notes:

In January of 2018, the parent sold Equipment to the subsidiary for a cash price of $97,500. The subsidiary retained the depreciation policy of the parent and depreciates the equipment over its remaining 6-year useful life.

Depreciation charged by the subsidiary on equipment is $97,500/6 i.e., $16,250

The parent had acquired the equipment at a cost of $112,500 and depreciated the equipment over its 9-year useful life using the straight-line method.

Depreciation charged by the parent on equipment is $112,500/9 i.e., $12,500.

Calculate excess depreciation:

$\begin{array}{c}\text{Excess Depreciation}=\$16,250-\$12,500\\ =\$3,750\end{array}$

b.

To determine

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

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 2018, the parent sold Equipment to the subsidiary for a cash price of $97,500. The subsidiary retained the depreciation policy of the parent and depreciates the equipment over its remaining 6-year useful life.

Depreciation charged by the subsidiary on equipment is $97,500/6 i.e., $16,250

The parent had acquired the equipment at a cost of $112,500 and depreciated the equipment over its 9-year useful life using the straight-line method.

Depreciation charged by the parent on equipment is $112,500/9 i.e., $12,500.

Calculate excess depreciation:

$\begin{array}{c}\text{Excess Depreciation}=\$16,250-\$12,500\\ =\$3,750\end{array}$

Operating expenses of the subsidiary is $\$109,500$

Gain on the sale of equipment is $\$60,000$

Through the BOY, one year has passed, so the deferred gain at the start of the current year is as follows:

$\begin{array}{c}\text{Deferred gain}=\$22,500-1\times \$3,750\\ =\$18,750\end{array}$

Hence, the remaining portion of the deferred gain on Jan 1, 2019 is $\$18,750$.

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.

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 $\$123,000$

AAP Depreciation is $\$22,500$

Deferred gain on intercompany sale is $\$3,750$

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

Particulars	Amount ($)
Subsidiary net income	$\$123,000$
AAP Depreciation	$(\$22,500)$
Deferred gain on intercompany sale	$(\$3,750)$
Income (loss) from subsidiary	$\$104,250$

Table (1)

Hence, the income (loss) from subsidiary is $\$104,250$.

d.

To determine

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

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 $\$445,500$

EOY Common stock of subsidiary is $\$450,000$.

Calculate EOY Unamortized AAP assets:

Particulars	Amount ($)	Dep./Amort.	Amount
PPE, net	$\$67,500$	$3\times \$6,750=\$20,250$	$\$47,250$
Patent	$\$90,000$	$3\times \$11,250=\$33,750$	$\$56,250$
Note Payable	$\$13,500$	$3\times \$4,500=\$13,500$
Goodwill	$\$135,000$		$\$135,000$
EOY AAP assets	$\underset{\_}{\underset{\_}{\$306,000}}$	$\underset{\_}{\underset{\_}{\$22,500}}$	$\underset{\_}{\underset{\_}{\$238,500}}$

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

Particulars	Amount ($)
EOY subsidiary retained earnings	$\$445,500$
EOY subsidiary common stock	$\$450,000$
Add: Unamortized AAP @ EOY	$\$238,500$
Less: Unconfirmed gain @ EOY	$\$15,000$
EOY Equity investment balance	$\$1,119,000$

Table (1)

Hence, the equity investment balance as on Dec 31, 2019 is $\$1,119,000$

e.

To determine

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

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:

Particulars	Amount ($)
Change in retained earnings (S) thru BOY	$\$171,000$
Cumulative AAP amort thru BOY	$\$45,000$
Less: BOY Downstream Unconf Asset	$\$18,750$
ADJ Amount	$\$107,250$

Table (1)

The required consolidation journal entries are as follows:

Date	Account title and Explanation	Post Ref	Debit ($)	Credit ($)
	[ADJ] BOY Equity Investment		$\$107,250$
	BOY Retained Earnings (P)			$\$107,250$
	[C] Income (loss) from subsidiary		$\$52,500$
	Dividends			$\$52,500$
	[E]  Common Stock (S) @ BOY		$\$450,000$
	Retained Earnings (S) @BOY		$\$375,000$
	Equity Investment			$\$825,000$
	[A]  PPE, net		$\$54,000$
	Patent		$\$67,500$
	Goodwill		$\$135,000$
	Notes Payable		$\$4,500$
	Equity Investment			$\$261,000$
	[D  Depreciation and Amort. expenses		$\$18,000$
	Interest Expense		$\$4,500$
	PPE, net			$\$6,750$
	Patent			$\$11,250$
	Notes Payable			$\$4,500$
	(To record depreciation and amortization expense for the [A] assets)
	[Igain] Equity investment @BOY		$\$18,750$
	PPE, net			$\$18,750$
	[Idep] PPE, net		$\$3,750$
	Depreciation Expense			$\$3,750$

Table (1)

f.

To determine

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

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		$1,395,000		$690,000	]					$2,085,000
Cost of goods sold		(750,000)		(420,000)						(1,170,000)
Gross Profit		645,000		270,000						915,000
Deprec. & amort. expense		(45,000)		(30,000)	[D]	18,0000	[Idep]	3,750		(89,250)
Operating Expenses		(405,000)		(109,500)						(514,500)
Interest Expense		(22,500)		(7,500)	[D]	4,500				(34,500)
Total Expenses		(472,500)		(147,000)						(638,250)
Income (loss) from subsidiary		52,500			[C]	52,500
Net Income		$225,000		$123,000						$276,250
Statement of Retained Earnings
Beginning Retained Earnings		$825,000		$375,000	[E]	375,000	[ADJ]	107,250		$932,250
Net Income		225,000		123,000						276,750
Dividends		(172,500)		(52,500)			[C]	52,500		(172,500)
Ending retained Earnings		$877,500		$445,500						$1,036,500
Balance Sheet
Assets
Cash		$105,000		$97,500						$202,500
Accounts receivable		195,000		127,500						322,500
Inventory		450,000		270,000						720,000
Equity investment		960,000			[ADJ]	102,250	[E]	825,000		0
					[Igain]	18,750	[A]	261,000
PPE, net		510,000		360,000	[A]	54,000	[D]	6,750		902,250
					[Idep]	3,750	[Igain]	18,750
Other Assets		195,000		270,000						465,000
Patent					[A]	67,500	[D]	11,250		56,250
Goodwill					[A]	135,000				135,000
Total Assets		$2,415,000		$1,125,000						$2,803,500
Liabilities and Stockholder's Equity
Accounts payable		$375,000		$61,500						$436,500
Accrued liabilities		37,500		93,000						130,500
Notes Payable		225,000		75,000	[A]	4,500	[D]	4,500		300,000
Common stock		900,000		450,000	[E]	450,000				900,000
EOY Retained earnings		877,500		445,500						1,036,500
Total liabilities and equity		$2,415,000		$1,125,000		$1,290,750		$1,290,750		$2,803,500