Question

Prepare consolidation spreadsheet for intercompany sale of equipment—Cost method Assume that a parent company acquired a subsidiary on January 1, 2012 for $847,000. The purchase price was $314,000 in excess of the book value of the subsidiary’s Stockholders’ Equity on the acquisition date. On the acquisition date, the subsidiary’s stockholders equity was comprised of $390,000 of no-par common stock and $143,000 of retained earnings. The Acquisition Accounting Premium (AAP) was assigned as follows: an increase of $18,000 in accounts receivable that were entirely collected during the year after acquisition, an increase of $65,000 for property, plant and equipment that has 10 years of remaining useful life, $109,000 for an unrecorded patent with an 8-year remaining life and $122,000 for goodwill. All amortizable components of the AAP are amortized using the straight-line method.

Answer 1

To prepare a consolidation spreadsheet for the intercompany sale of equipment using the cost method, follow these steps:

1. Prepare Parent and Subsidiary Trial Balances:

- Create trial balances for both the parent company and the subsidiary as of January 1, 2012, and at the end of the year after acquisition.

2. Adjust for Acquisition Accounting Premium (AAP):

- The AAP components include an increase in accounts receivable, property, plant and equipment (PPE), an unrecorded patent, and goodwill.

- Calculate the annual amortization for each component using the straight-line method. For example:

- Accounts Receivable: $18,000 / 1 year = $18,000 per year

- PPE: $65,000 / 10 years = $6,500 per year

- Unrecorded Patent: $109,000 / 8 years = $13,625 per year

- Goodwill: No amortization (it's indefinite).

- Create a new line in both parent and subsidiary trial balances to account for the annual amortization of AAP.

3. Eliminate Intercompany Sale of Equipment:

- The parent company sold equipment to the subsidiary. On the parent's books, recognize the sale and eliminate the equipment's carrying amount.

- On the subsidiary's books, recognize the purchase of the equipment and eliminate the corresponding amount.

4. Calculate Consolidated Trial Balances:

- Combine the adjusted parent and subsidiary trial balances to create consolidated trial balances for both January 1, 2012, and the end of the year after acquisition.

5. Eliminate Intercompany Transactions:

- Eliminate intercompany accounts and transactions, such as intercompany revenue, expenses, and dividends. This ensures that only external transactions are reflected in the consolidated financial statements.

6. Calculate Consolidated Net Income:

- Calculate the consolidated net income by adding the parent's and subsidiary's net incomes together after eliminating intercompany transactions.

7. Calculate Consolidated Retained Earnings:

- Determine the consolidated retained earnings by adding the parent's and subsidiary's retained earnings and adjusting for the consolidated net income and any dividends.

8. Prepare Consolidated Financial Statements:

- Using the consolidated trial balances, prepare consolidated financial statements, including the consolidated balance sheet, income statement, and statement of retained earnings.

Ensure that all eliminations, adjustments, and calculations are accurately reflected in the consolidated financial statements. The consolidated balance sheet should include the elimination of the investment in subsidiary and the equity accounts of the subsidiary.

The income statement should reflect only external revenue and expenses. The statement of retained earnings should show the adjustments for net income and dividends.