Parent purchased Subsidiary on January 1, 2013. The excess of investment cost over book value was allocated as follows:
Equipment (20-year life) $110,000
Customer list (10-year life) 192,500
Patent (10-year life) 137,500
Goodwill 110,000
Total $550,000
Parent regularly sells merchandise to Subsidiary. In 2015, inter-company sales amounted to $48,070, with $14,253 of deferred profit remaining in ending inventory. Year-end inter-company receivables/payables amounted to $14,560.
In 2016, inter-company sales amounted to $74,800 with $21,318 of deferred profit remaining in ending inventory. Year-end inter-company receivables/payables amounted to $29,920.
Financial statements of Parent and Subsidiary for the year ended December 31, 2016 are presented below.
|
Parent
|
Subsidiary
|
|
Sales revenue
|
$4,807,000
|
$ 1,722,600
|
|
Cost of goods sold
|
(3,364,900)
|
(1,033,560)
|
|
Gross profit
|
1,442,100
|
689,040
|
|
Operating expenses
|
(913,030)
|
(447,876)
|
|
Equity income
|
195,599
|
_
|
|
Net Income
|
$ 724,669
|
$ 241,164
|
|
|
|
|
Retained Earnings, 1/1/16
|
$2,415,037
|
$ 890,010
|
|
Net income
|
724,669
|
241,164
|
|
Dividends
|
(138,780)
|
(31,352)
|
|
Retained Earnings, 12/31/16
|
$3,000,926
|
$ 1,099,822
|
|
|
|
|
Cash and receivables
|
$1,345,251
|
$ 956,434
|
|
Inventory
|
932,558
|
513,334
|
|
Equity investment
|
1,732,894
|
|
|
Property, plant & equipment (Net)
|
4,485,892
|
949,728
|
|
Total Assets
|
$8,496,595
|
$2,419,496
|
|
|
|
|
Accounts payable
|
$ 639,306
|
$ 205,608
|
|
Accrued liabilities
|
722,813
|
281,476
|
|
Notes payable
|
2,750,000
|
574,200
|
|
Common stock
|
785,945
|
114,840
|
|
Additional paid-in capital
|
597,605
|
143,550
|
|
Retained Earnings, 12/31/16
|
3,000,926
|
1,099,822
|
|
Total Liabilities and Equities
|
$8,496,595
|
$2,419,496
|
Required:
a. Prepare the 2016 journal entries, required by the equity method, on Parent's books.
b. Prepare the consolidation entries for 2016.