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Advanced Accounting Ch3 Cost Method

The document provides consolidated financial statements for a parent company and its subsidiary as of December 31, 2016. It asks to recreate the consolidation entries for the year using the cost method, under which the parent company's investment in the subsidiary equals the original purchase price. Key entries include: (1) recording the subsidiary's net income and dividends under the parent's income statement, (2) reducing the investment balance for amortization of acquisition assets, and (3) eliminating the subsidiary's equity accounts in consolidation by increasing the investment balance.

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306 views

Advanced Accounting Ch3 Cost Method

The document provides consolidated financial statements for a parent company and its subsidiary as of December 31, 2016. It asks to recreate the consolidation entries for the year using the cost method, under which the parent company's investment in the subsidiary equals the original purchase price. Key entries include: (1) recording the subsidiary's net income and dividends under the parent's income statement, (2) reducing the investment balance for amortization of acquisition assets, and (3) eliminating the subsidiary's equity accounts in consolidation by increasing the investment balance.

Uploaded by

Fiona Ta
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Acct 3533 Advanced Accounting

F’19
Class Exercise Ch 3
Initial Value or Cost method

Inferring consolidation entries from consolidated financial statements—Cost method


Assume a parent company acquired a subsidiary on January 1, 2012. The purchase price was
$1,242,000 in excess of the subsidiary’s book value of Stockholders’ Equity on the acquisition date,
and that excess was assigned to the following [A] assets:
[A] Asset Original Amount Original Useful Life
Property, plant and equipment (PPE), net $300,000 20 years
Patent 432,000 12 years
Goodwill 510,000 Indefinite
$1,242,000

The parent company uses the cost method of pre-consolidation Equity Investment bookkeeping.
The Goodwill asset has been tested annually for impairment and has not been found to be
impaired. Selected accounts from the parent, subsidiary, and consolidated financial statements for
the year ended December 31, 2016, are as follows:
Parent Subsidiary Consolidated
Income statement
Sales $9,075,000 $1,980,000 11,055,000
Cost of goods sold (6,534,000) (1,188,000) (7,722,000)
Gross profit 2,541,000 792,000 3,333,000
Investment income 40,800 - -
Operating expenses (1,361,280) (514,800) (1,927,080)
Net income $1,220,520 $277,200 $1,405,920
Statement of retained earnings
BOY retained earnings 6,328,440 1,023,000 6,574,440
Net income 1,220,520 277,200 1,405,920
Dividends (286,440) (40,800) (286,440)
Ending retained earnings $7,262,520 $1,259,400 $7,693,920
Balance sheet
Assets
Cash 1,709,760 511,200 2,220,960
Accounts receivable 2,686,800 459,600 3,146,400
Inventory 3,520,200 589,800 4,110,000
Equity investment 2,112,000 - -
Property, plant & equipment 12,752,640 1,091,400 14,069,040

1
Parent Subsidiary Consolidated
Patent list 252,000
Goodwill - - 510,000
$22,781,400 $2,652,000 $22,308,400
Liabilities and stockholders' equity - -
Accounts payable 1,328,640 188,760 1,517,400
Accrued liabilities 1,578,840 246,840 1,825,680
Long-term liabilities 5,550,000 660,000 6,210,000
Common stock 845,520 132,000 845,520
APIC 6,215,880 165,000 6,215,880
Retained earnings 7,262,520 1,259,400 7,693,920
$22,781,400 $2,652,000 $24,308,400

Recreate the consolidation entries for the year ended 2016.

49. Under the cost method (and 100% ownership), it equals the dividends of the subsidiary

Under the cost method, it is the original purchase price for the subsidiary.

Parent Income (cost method) $1,220,520


Deduct: p% of subsidiary dividends (40,800)
Add: p% of subsidiary net income 277,200
Deduct: p% AAP amortization for year (51,000)
Parent Income (equity method) $1,405,920

Investment balance (cost) $2,112,000


Deduct: AAP on acquisition date (1,242,000)
Deduct: Common stock (S) on acquisition date (132,000)
Deduct: APIC (S) on acquisition date (165,000)
Retained earnings (S) on acquisition date $573,000

The subsidiary’s stockholders’ equity is not held by a party outside of the economic
entity represented in the consolidated financial statements and, as a result, should
not be included in the consolidated stockholders’ equity.

2
49. f.
[C] BOY Equity Investment 246,000
BOY Retained Earnings (P) 246,000

[I &D] Equity income 40,800


Dividends 40,800

[S] BOY Common stock (S) 132,000


BOY APIC (S) 165,000
BOY Retained earnings (S) 1,023,000
Equity investment 1,320,000

[A] PPE 240,000


Patent 288,000
Goodwill 510,000
Equity Investment 1,038,000

[E] Operating expenses 51,000


PPE 15,000
Patent 36,000

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