7-Parent purchased Subsidiary on January 1, 2019. The parent uses the equity method to account for its investment in its subsidiary. The excess of investment cost over book value was allocated as follows: Equipment (20-year life) $400,000 Customer list (10-year life) 90,000 Patent (5-year life) 125,000 Goodwill 165,000 Total $780,000 Parent regularly sells merchandise to Subsidiary. In 2021, inter-company sales amounted to $60,100, with $18,000 of deferred profit remaining in ending inventory. Year-end inter-company receivables/payables amounted to $24,000. In 2022, inter-company sales amounted to $98,000 with $45,000 of deferred profit remaining in ending inventory. Year-end inter- company receivables/payables amounted to $35,000. Financial statements of Parent and Subsidiary for the year ended December 31, 2022 are presented below. Parent Subsidiary. Sales revenue $687,000 $750,000 Cost of goods sold -425,000 -350,000 Gross profit 262,000 400,000 Operating expenses -125,000 -36,700 Income (loss) from subsidiary 282,300 Net Income $419,300 $363,300 Retained Earnings, 1/1/22 $620,400 $240,000 Net income 419,300 363,300 Dividends -98,000 -12,000 Retained Earnings, 12/31/22 $941,700 $591,300 Cash and receivables $850,000 $750,000 Inventory 125,000 265,000 Equity investment 1,524,700 Property, plant & 1,042,000 equipment (Net) 1,337,860 Total Assets $3,541,700 $2,352,860 Accounts payable $55,000 $311,210 Accrued liabilities 450,000 370,650 Notes payable 1,250,000 665,300 Common stock 95,000 183,950 Additional paid- in capital 750,000 230,450 Retained Earnings, 12/31/22 941,700 591,300 Total Liabilities and Equities $3,541,700 $2,352,860 Required: a. Prepare the 2022 journal entries, required by the equity method, on Parent's pre- consolidation books. b. Prepare the consolidation entries for 2022

7-Parent purchased Subsidiary on January 1, 2019. The…

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Solution ;

a).

Date	Particulars	Debit	Credit
	Investment in subsidiary a/c	282300
	To Equity income in subsidiary		282300
	(Recorded income in subsidiary)

	Cash a/c	9324
	To Investment in equity a/c		9324
	(Divident received from subsidiary)

Working note *

Holding in subsidiary = Share in profit of the subsidiary / Profit in subsidiary

= 282300 / 363300 = 77.7 %

Divident received by parent = 12000 * 77.7% = $ 9324

b) . Consolidation entries

Date	Particulars	Debit	Credit
	Profit & loss a/c	45000
	To Inventory in subsidiary a/c		45000
	(Elimination of profit on inventory of subsidiary)

	Accounts payable of subsidiary a/c	35000
	To Accounts receivable a/c		35000
	(Eliminated intra - company accounts receivable and accounts payable)

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