1. On January 1, 20X1, Parent Company acquired 80% of the common stock of Subsidiary Company for $560,000. On this date Subsidiary had total owners’ equity of $540,000, including retained earnings of $240,000. During 20X1, Subsidiary had net income of $60,000 and paid no dividends.
Any excess of cost over book value is attributable to land, undervalued $10,000, and to goodwill.
During 20X1 and 20X2, Parent has appropriately accounted for its investment in Subsidiary using the cost method.
On January 1, 20X2, Parent held merchandise acquired from Subsidiary for $10,000. During 20X2, Subsidiary sold merchandise to Parent for $100,000, of which $20,000 is held by Parent on December 31, 20X2. Subsidiary’s usual gross profit on affiliated sales is 40%.
On December 31, 20X2, Parent still owes Subsidiary $20,000 for merchandise acquired in December.
On January 1, 20X2, Parent sold to Subsidiary some equipment with a cost of $50,000 and a book value of $20,000. The sales price was $40,000. Subsidiary is depreciating the equipment over a five-year life, assuming no salvage value and using the straight-line method.
Complete the worksheet for consolidated financial statements for the year ended December 31, 20X2.
2. On January 1, 20X1, Parent Company acquired 100% of the common stock of Subsidiary Company for $365,000. On this date, Subsidiary had common stock, other paid in capital, and retained earnings of $50,000, $100,000, and $200,000 respectively. Any excess of cost over book value is due to goodwill. Parent uses the simple equity method to account for its investment in subsidiary.
On January 1, 20X2, Parent purchased equipment for $174,120 and immediately leased the equipment to Subsidiary on a 4-year lease. The transaction was legally structured as a sales-type lease with a present value for the minimum lease payments of $204,120. Parent recorded the following entry:
Minimum Lease Payments Receivable 240,000
Unearned Interest Income 35,880
Sales Profit on Lease 30,000
The minimum lease payments of $60,000 are to be made annually on January 1, beginning immediately, for a total of 4 payments. The implicit interest rate is 12%. The lease provides for an automatic transfer of title at the end of 4 years. The estimated useful life of the equipment is 6 years. The lease has been capitalized by both companies.
A lease amortization schedule, applicable to either company, is presented below:
Carrying Carrying Interest Principal
Value on Value Rate Interest Payment Reduction
1-1-X2 144,120 12% $17,294 $60,000 $42,706
1-1-X3 101,414 12% 12,170 60,000 47,830
1-1-X4 53,584 12% 6,416* 60,000 53,584
1-1-X5 $ 0 *Adjusted for rounding error.
Complete the worksheet for consolidated financial statements for the year ended December 31, 20X2. Round all computations to the nearest dollar.
3. On January 1, 20X8, Paul Company purchased 80% of the common stock of Smith Company for $300,000. On this date Smith had total owners’ equity of $350,000. Any excess of cost over book value is attributed to a patent, to be amortized over 10 years.
During 20X8, Paul has accounted for its investment in Smith using the simple equity method.
During 20X8, Paul sold merchandise to Smith for $50,000, of which $10,000 is held by Smith on December 31, 20X8. Paul’s gross profit on sales is 40%.
During 20X8, Smith sold some land to Paul at a gain of $10,000. Paul still holds the land at year end.
Paul and Smith qualify as an affiliated group for tax purposes and thus will file a consolidated tax return. Assume a 30% corporate income tax rate.
Complete the following worksheet for consolidated financial statements for the year ended December 31, 20X8.