Question - Delta Company purchased all of the voting stock of Alpha Company on January 1, 19x2, for $400,000. Delta Company uses the cost method of accounting for its investment in Alpha Company. At the date of acquisition, the book values of all Alpha Company assets and liabilities were exactly equal to their fair market values, with the exception of Plant Assets which were undervalued $40,000. Any goodwill is to be amortized over the maximum period permissible. All depreciable assets on both sets of records are being depreciated uniformly over a 20-year period beginning on January 1, 19x2, with no estimated salvage value. During 19x2 Alpha Company had a loss of $20,000 and paid no dividends. During 19x2 and 19x3, Alpha Company sold merchandise to Delta Company at a markup of 25% of cost. The amounts charged Delta Company by Alpha Company were $60,000 and $80,000, respectively. At the end of 19x2, Delta Company's ending inventory, all sold in 19x3, included goods valued at $25,000 which were acquired from Alpha Company, and at the end of 19x3 the corresponding figure was $20,000. Delta Company acquired $100,000, 8%, Alpha Company bonds on January 1, 19x2, shortly after the stock was purchased. At that time the market value of the bonds was equal to par. Interest is paid annually on December 31.

(a) Complete the accompanying consolidating work sheet, using trial balances for 19x3. Include notes to explain the entries.

(b) If a parent company uses the equity method of accounting for its investment in a subsidiary rather than the cost method, what effect will this have on the final figures of the consolidated financial statements? Why?

DELTA COMPANY - Consolidating Work Sheet December 31, 19x3

Account Title  Delta Company  Alpha Company  Elimin Entries Credits /Debits  Consolidated Trial Bal

Inventory                        $ 200,000              $ 50,000

Other Current Assets        400,000               200,000

Plant Assets (Net)           1,000,000              400,000

Investment in Alpha Co    400,000

Invest in Alpha Bonds       100,000

Cost of Goods Sold        4,000,000               800,000

Depreciation Expense       200,000                  50,000

Interest Expense                                              40,000

Other Expense                600,000                  80,000

Current Liabilities          (300,000)

Bonds Payable                                                (500,000)

Sales                               (5,500,000)             (980,000)

Interest Income                (8,000)

Paid-in Capital-Delta      (100,000)

Paid-in Capital-Alpha                                   (40,000)

Retained Earnings-Delta     (992,000)

Retained Earnings-Alpha                              (100,000)

               0                                   0