Question & Answer: Determining ending consolidated balances in the second year following the acquisition—Cost method…..

Determining ending consolidated balances in the second year following the acquisition—Cost method
Assume a parent company acquired a subsidiary on January 1, 2015, for $2,036,000. The purchase price was $916,200 in excess of the subsidiary’s $1,119,800 book value of Stockholders’ Equity on the acquisition date. Of this excess purchase price, $452,000 was assigned to Property, plant and equipment with a remaining economic useful life of 10 years, and $464,200 was assigned to Goodwill. On the acquisition date, the subsidiary reported retained earnings equal to $847,550. The parent uses the cost method of pre-consolidation Equity investment bookkeeping. The financial statements of the parent and its subsidiary for the year ended December 31, 2016, are as follows:

Parent Subsidiary Parent Subsidiary
Income statement Balance sheet
Sales $8,318,750 $1,865,000 Assets
Cost of goods sold (5,989,500) (1,089,000) Cash $1,567,280 $468,600
Gross profit 2,329,250 776,000 Accounts receivable 2,462,900 421,300
Equity income 37,400 Inventory 3,326,850 540,650
Operating expenses (1,247,840) (521,900) Equity investment 2,036,000
Net income $1,118,810 $254,100 Property, plant & equipment 17,189,920 1,000,450
Statement of retained earnings $26,582,950 $2,431,000
BOY retained earnings 5,801,070 937,750 Liabilities and stockholders’ equity
Net income 1,118,810 254,100 Accounts payable $1,217,920 $173,030
Dividends (262,570) (37,400) Accrued liabilities 1,447,270 226,270
Ending retained earnings $6,657,310 $1,154,450 Long-term liabilities 10,587,500 605,000
Common stock 875,060 121,000
APIC 5,797,890 151,250
Retained earnings 6,657,310 1,154,450
$26,582,950 $2,431,000

At what amount will the following accounts appear on the consolidated financial statements?

a. Sales
b. Investment income
c. Operating expenses
d. Inventories
e. Equity investment
f. Property, plant & equipment, net
g. Goodwill
h. Common stock
i. Retained earnings

Expert Answer

 

(a)- Sales – $ 10183750

(b) Investment Income- Nil

(c) Operating Expenses- $ 1769740

(d) Inventories- $ 3867500

(e) Equity investment- Nil

(f) Property Plant and Equipment- $ 18190370

(g) Goodwill- $464,200

(h) Common Stock- $ 875,060

(i) Retained earning- $ 7811760

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