Assume that a parent company acquired a subsidiary on January 1, 2010. The purchase price was $500,000 million in excess of the subsidiary's book value of Stockholders' Equity on the acquisition date, and that excess was assigned to the following AAP assets: AAP Asset
Original
Amount
Original Useful
Life (years)
Property, plant and equipment (PPE), net
$100,000
20
Customer list
165,000
10
Royalty agreement
135,000
10
Goodwill
100,000
indefinite
$500,000
The AAP assets with a definite useful life have been amortized as part of the parent's equity method accounting. The Goodwill asset has been tested annually for impairment, and has not been found to be impaired.
Assume that the parent company sells inventory to its wholly owned subsidiary. The subsidiary, ultimately, sells the inventory to customers outside of the consolidated group. You have compiled the following data for the years ending 2012 and 2013:
Inventory
Sales
Gross Profit
Remaining
in Unsold
Inventory
Receivable
(Payable)
2013
$68,000
$19,580
$27,400
2012
$43,700
$12,797
$13,437
The inventory not remaining at the end of the year has been sold to unaffiliated entities outside of the consolidated group. The parent uses the equity method to account for its Equity Investment.
The financial statements of the parent and its subsidiary for the year ended December 31, 2013, follow in part d. below.
a. Show the computation to yield the pre-consolidation $69,837 Income (loss) from subsidiary reported by the parent during 2013. Hint: Use negative signs with answers when appropriate.
b. Show the computation to yield the Equity Investment balance of $959,789 reported by the parent at December 31, 2013. Hint: Use negative signs with answers when appropriate.
Common stock
APIC
Retained earnings
BOY unamortized AAP
BOY deferred profit
Income (loss) from subsidiary
Dividends
Equity investment
c. Prepare the consolidation journal entries for the year ended December 31, 2013. d. Prepare the consolidation spreadsheet for the year ended December 31, 2013. Hint: Use negative signs with answers when appropriate.
d. Prepare the consolidation spreadsheet for the year ended December 31, 2013. Hint: Use negative signs with answers when appropriate.