Assume that a parent company acquired a subsidiary on January 1, 2010. The purchase price was… 1 answer below »

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 AssetOriginal
AmountOriginal Useful
Life (years)Property, plant and equipment (PPE), net$100,00020Customer list165,00010Royalty agreement135,00010Goodwill100,000indefinite$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
SalesGross Profit
Remaining
in Unsold
Inventory
Receivable
(Payable)2013$68,000$19,580$27,4002012$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.AnswerCashAccounts receivableInventoryPPE, netCustomer listRoyalty agreementGoodwillAccounts payableOther current liabilitiesLong-term liabilitiesNet income of subsidiarySalesCost of goods soldPrior year intercompany gross profitCurrent year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investmentRetained earningsAPICCommon stockBOY retained earningsEOY retained earningsBOY unamortized AAPDividends</selectutf8,%3csvg">AnswerPlus:AnswerCashAccounts receivableInventoryPPE, netCustomer listRoyalty agreementGoodwillAccounts payableOther current liabilitiesLong-term liabilitiesNet income of subsidiarySalesCost of goods soldPrior year intercompany gross profitCurrent year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investmentRetained earningsAPICCommon stockBOY retained earningsEOY retained earningsBOY unamortized AAPDividends</selectutf8,%3csvg">AnswerLess:AnswerCashAccounts receivableInventoryPPE, netCustomer listRoyalty agreementGoodwillAccounts payableOther current liabilitiesLong-term liabilitiesNet income of subsidiarySalesCost of goods soldPrior year intercompany gross profitCurrent year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investmentRetained earningsAPICCommon stockBOY retained earningsEOY retained earningsBOY unamortized AAPDividends</selectutf8,%3csvg">AnswerAAP depreciationAnswerIncome (loss) from subsidiaryAnswer

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 stockAnswerAPICAnswerRetained earningsAnswerBOY unamortized AAPAnswerBOY deferred profitAnswerIncome (loss) from subsidiaryAnswerDividendsAnswerEquity investmentAnswer

c. Prepare the consolidation journal entries for the year ended December 31, 2013.Consolidation WorksheetDescriptionDebitCredit[C]AnswerCashAccounts receivableInventoryPPE, netCustomer listRoyalty agreementGoodwillAccounts payableOther current liabilitiesLong-term liabilitiesNet income of subsidiarySalesCost of goods soldPrior year intercompany gross profitCurrent year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investmentRetained earningsAPICCommon stockBOY retained earningsEOY retained earningsBOY unamortized AAPIncome (loss) from subsidiaryDividends</selectutf8,%3csvg">AnswerAnswerDividendsAnswerAnswerAnswerCashAccounts receivableInventoryPPE, netCustomer listRoyalty agreementGoodwillAccounts payableOther current liabilitiesLong-term liabilitiesNet income of subsidiarySalesCost of goods soldPrior year intercompany gross profitCurrent year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investmentRetained earningsAPICCommon stockBOY retained earningsEOY retained earningsBOY unamortized AAPIncome (loss) from subsidiaryDividends</selectutf8,%3csvg">AnswerAnswer[E]Common stockAnswerAnswerAPICAnswerAnswerAnswerCashAccounts receivableInventoryPPE, netCustomer listRoyalty agreementGoodwillAccounts payableOther current liabilitiesLong-term liabilitiesNet income of subsidiarySalesCost of goods soldPrior year intercompany gross profitCurrent year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investmentPatentAPICCommon stockBOY retained earningsEOY retained earningsBOY unamortized AAPDividends</selectutf8,%3csvg">AnswerAnswerAnswerCashAccounts receivableInventoryPPE, netCustomer listRoyalty agreementGoodwillAccounts payableOther current liabilitiesLong-term liabilitiesNet income of subsidiarySalesCost of goods soldPrior year intercompany gross profitCurrent year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investmentRetained earningsAPICCommon stockBOY retained earningsEOY retained earningsBOY unamortized AAPDividends</selectutf8,%3csvg">AnswerAnswer[A]PPE netAnswerAnswerCustomer listAnswerAnswerRoyalty agreementAnswerAnswerAnswerCashAccounts receivableInventoryPPE, netCustomer listRoyalty agreementGoodwillAccounts payableOther current liabilitiesLong-term liabilitiesNet income of subsidiarySalesCost of goods soldPrior year intercompany gross profitCurrent year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investmentRetained earningsAPICCommon stockBOY retained earningsEOY retained earningsBOY unamortized AAPDividends</selectutf8,%3csvg">AnswerAnswerAnswerCashAccounts receivableInventoryPPE, netCustomer listRoyalty agreementGoodwillAccounts payableOther current liabilitiesLong-term liabilitiesNet income of subsidiarySalesCost of goods soldPrior year intercompany gross profitCurrent year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investmentRetained earningsAPICCommon stockBOY retained earningsEOY retained earningsBOY unamortized AAPDividends</selectutf8,%3csvg">AnswerAnswer[D]AnswerCashAccounts receivableInventoryPPE, netCustomer listRoyalty agreementGoodwillAccounts payableOther current liabilitiesLong-term liabilitiesNet income of subsidiarySalesCost of goods soldPrior year intercompany gross profitCurrent year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investmentRetained earningsAPICCommon stockBOY retained earningsEOY retained earningsBOY unamortized AAPDividends</selectutf8,%3csvg">AnswerAnswerPPE netAnswerAnswerCustomer listAnswerAnswerAnswerCashAccounts receivableInventoryPPE, netCustomer listRoyalty agreementGoodwillAccounts payableOther current liabilitiesLong-term liabilitiesNet income of subsidiarySalesCost of goods soldPrior year intercompany gross profitCurrent year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investmentRetained earningsAPICCommon stockBOY retained earningsEOY retained earningsBOY unamortized AAPBOY deferred profitDividends</selectutf8,%3csvg">AnswerAnswer[Icogs]AnswerCashAccounts receivableInventoryPPE, netCustomer listRoyalty agreementGoodwillAccounts payableOther current liabilitiesLong-term liabilitiesNet income of subsidiarySalesCost of goods soldPrior year intercompany gross profitCurrent year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investmentRetained earningsAPICCommon stockBOY retained earningsEOY retained earningsBOY unamortized AAPDividends</selectutf8,%3csvg">AnswerAnswerAnswerCashAccounts receivableInventoryPPE, netCustomer listRoyalty agreementGoodwillAccounts payableOther current liabilitiesLong-term liabilitiesNet income of subsidiarySalesCost of goods soldPrior year intercompany gross profitCurrent year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investmentRetained earningsAPICCommon stockBOY retained earningsEOY retained earningsBOY unamortized AAPDividends</selectutf8,%3csvg">AnswerAnswer[Isales]AnswerCashAccounts receivableInventoryPPE, netCustomer listRoyalty agreementGoodwillAccounts payableOther current liabilitiesLong-term liabilitiesNet income of subsidiarySalesCost of goods soldPrior year intercompany gross profitCurrent year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investmentRetained earningsAPICCommon stockBOY retained earningsEOY retained earningsBOY unamortized AAPDividends</selectutf8,%3csvg">AnswerAnswerAnswerCashAccounts receivableInventoryPPE, netCustomer listRoyalty agreementGoodwillAccounts payableOther current liabilitiesLong-term liabilitiesNet income of subsidiarySalesCost of goods soldPrior year intercompany gross profitCurrent year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investmentRetained earningsAPICCommon stockBOY retained earningsEOY retained earningsBOY unamortized AAPDividends</selectutf8,%3csvg">AnswerAnswer[Icogs]AnswerCashAccounts receivableInventoryPPE, netCustomer listRoyalty agreementGoodwillAccounts payableOther current liabilitiesLong-term liabilitiesNet income of subsidiarySalesCost of goods soldPrior year intercompany gross profitCurrent year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investmentRetained earningsAPICCommon stockBOY retained earningsEOY retained earningsBOY unamortized AAPDividends</selectutf8,%3csvg">AnswerAnswerAnswerCashAccounts receivableInventoryPPE, netCustomer listRoyalty agreementGoodwillAccounts payableOther current liabilitiesLong-term liabilitiesNet income of subsidiarySalesCost of goods soldPrior year intercompany gross profitCurrent year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investmentRetained earningsAPICCommon stockBOY retained earningsEOY retained earningsBOY unamortized AAPDividends</selectutf8,%3csvg">AnswerAnswer[Ipay]AnswerCashAccounts receivableInventoryPPE, netCustomer listRoyalty agreementGoodwillAccounts payableOther current liabilitiesLong-term liabilitiesNet income of subsidiarySalesCost of goods soldPrior year intercompany gross profitCurrent year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investmentRetained earningsAPICCommon stockBOY retained earningsEOY retained earningsBOY unamortized AAPDividends</selectutf8,%3csvg">AnswerAnswerAnswerCashAccounts receivableInventoryPPE, netCustomer listRoyalty agreementGoodwillAccounts payableOther current liabilitiesLong-term liabilitiesNet income of subsidiarySalesCost of goods soldPrior year intercompany gross profitCurrent year intercompany gross profitAAP depreciationOperating expensesNet incomeEquity investmentRetained earningsAPICCommon stockBOY retained earningsEOY retained earningsBOY unamortized AAPDividends</selectutf8,%3csvg">AnswerAnswer

d. Prepare the consolidation spreadsheet for the year ended December 31, 2013. Hint: Use negative signs with answers when appropriate.

 

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