Parent Co. owns 9,500 shares of Sub Co. and accounts for its investment by the equity method. On December 31, Year 5, the shareholders’ equity of Sub was as follows:
Common shares (10,000 shares issued)... $100,000
Retained earnings.......... 170,000
On January 1, Year 6, Parent sold 1,900 shares from its holdings in Sub for $66,500. On this date and prior to the sale, the balance in the investment in Sub account was $320,000, and the unamortized acquisition differential was allocated in the following manner:45% to land 30% to equipment (remaining useful life, 4 years) 25% to patents (remaining useful life, 10 years)
During Year 6, Sub reported a net income of $150,000 and paid dividends totalling $70,000.
Required:
(a) (i) Prepare the journal entry that Parent would make on January 1, Year 6, to record the sale of the 1,900 shares.
(ii) Calculate the amount of the unamortized acquisition differential that would be allocated to land, equipment, and patents on December 31, Year 6.
(iii) Prepare an independent proof of the unamortized acquisition differential on December 31, Year 6.
(b) The accountant of Parent must prepare a consolidated cash flow statement for Year 6 by analyzing the changes in the consolidated balance sheets from December 31, Year 5, to December 31, Year 6. She needs some assistance in determining what effect Parent’s sale of 1,900 shares had on the consolidated financial statements.
Prepare a journal entry to record the effect that the January 1, Year 6, sale of shares had on the consolidated entity.