On January 1, 20X1, Parent Company purchased 100% of the common stock of Subsidiary Company for $750,000 in cash. On this date, Subsidiary had common stock, other paid-in capital, and retained earnings of $100,000, $200,000, and $240,000, respectively. Net income and dividends for 2 years for Subsidiary Company were as follows:
20X1 20X2
Net income $50,000 $100,000
Dividends 10,000 30,000
On January 1, 20X1, the only tangible assets of Subsidiary that were undervalued were inventory and building. Inventory, for which FIFO is used, was worth $5,000 more than cost. The inventory was sold in 20X1. Building, which was worth $15,000 more than book value, has a remaining life of 8 years, and straight-line depreciation is used. Any remaining excess is goodwill.
During 20X1 and 20X2, Parent has appropriately accounted for its investment in Subsidiary using the simple equity 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.
Required:
1. Prepare a value analysis schedule
2. Prepare a determination and distribution of excess schedule
3. Prepare supportive Income Distribution Schedules for Subsidiary and Parent for 20X2.
4. Prepare all necessary elimination entries for the consolidating worksheet of December 31, 20X2. Assume Parent uses the simple equity method of accounting for its investment in Subsidiary.
5. Complete the worksheet for consolidated financial statements for the year ended December 31, 20X2.
6. Prepare consolidated statements including, statement of earnings and balance sheet