On January 1, 2013, a parent company purchased 100 percent of the stock of a subsidiary company
Question:
On January 1, 2013, a parent company purchased 100 percent of the stock of a subsidiary company for € 277,500. The subsidiary’s stockholders’ equity accounts at the acquisition date amount to € 146,250 for Common Stock, and € 33,750 for Retained Earnings.
The subsidiary’s recorded book values at the acquisition date were equal to fair values for all items except for the following items:
- accounts receivable book value of € 41,250 and a fair value of € 36,000,
- property, plant & equipment, the net book value of € 112,500 and a fair value of € 126,000,
- a previously unrecorded patent with a fair value of € 22,500, and
- notes payable book value of € 22,500 and a fair value of € 18,750.
Both companies use the FIFO inventory method and sell all of their inventories at least once per year. The year-end net balance of accounts receivables is collected in the following year. On the acquisition date, the subsidiary’s property, plant & equipment, the net had a remaining useful life of 10 years, the patent had a remaining useful life of 4 years, and notes payable had a remaining term of 5 years.
On January 1, 2016, the parent' sold a building with a net book value of € 41,250 to the subsidiary for € 60,000. Both companies estimated that the building has a remaining life of 10 years on the intercompany sale date, with no salvage value.
Each company routinely sells merchandise to the other company, with a profit margin of 40% of selling price (regardless of the direction of the sale). During 2017, intercompany sales amount to € 37,500, of which € 15,000 of merchandise remains in the ending inventory of the subsidiary. On December 31, 2017, € 7,500 of these intercompany sales remained unpaid. Additionally, the parent’s December 31, 2016 inventory includes € 11,250 of merchandise purchased in the preceding year from the subsidiary. During 2016, intercompany sales amount to € 30,000, and on December 31, 2016, € 5,000 of these intercompany sales remained unpaid.
The parent accounts for its investment in the subsidiary using the equity method. Unconfirmed profits are allocated pro-rata. The pre-closing trial balances (and additional information) for the two companies for the year ended December 31, 2017, are provided on the next page.
Required:
a. Prepare a consolidation spreadsheet using the December 31, 2017, pre-closing trial balance information for the parent and subsidiary.
b. Disaggregate and document the activity for the 100% Acquisition Accounting Premium (AAP).
c. Complete the consolidating entries according to the C-E-A-D-I sequence and explain the entries in detail.
d. Complete the consolidation and prepare the consolidated financial statements that would be published to the shareholders.
Fundamentals of Advanced Accounting
ISBN: 978-0077667061
5th edition
Authors: Joe Ben Hoyle, Thomas Schaefer, Timothy Doupnik