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48. Consolidation at the end of the first year subsequent to date of acquisition-Equity method Assume the parent company acquires its subsidiary on January 1, 2019, by exchanging 59,000 shares of its $1 par value Common Stock, with a market value on the acquisition date of $30 per share, for all of the outstanding voting shares of the acquiree. You have been charged with preparing the consolidation of these two companies at the end of the first year. On the acquisition date, all of the subsidiary's individual net assets had fair values that equaled their book values except for the following: PPE assets are undervalued by $120,000 (depreciation = $10,000 per year), and the subsidiary has an unrecorded Patent that has a fair value of $320,000 (amor- tization = $40,000 per year). Any remaining difference between the purchase price and the fair value of the identifiable assets results from expected synergies that are expected to be realized as a result of the business combination. Following are financial statements of the parent and its subsidiary for the year ended December 31, 2019: Parent Subsidiary Income statement: Sales. Cost of goods sold. Gross profit. Equity income Operating expenses Net income Parent Subsidiary Balance sheet: $5,500,000 $1,600,000 Assets (3,800,000) (950,000) Cash... 1,700,000 650,000 Accounts receivable 150,000 Inventory (1,000,000) (450,000) Equity investment.. $ 850,000 $ 200,000 Property, plant and equipment (PPE), net... $ 300,000 700.000 940,000 1,860,000 3,400,000 $7,200,000 $ 120,000 360,000 600,000 920,000 $2,000,000 Statement of retained earnings: Beginning retained earnings... $2,800,000 $ 800,000 Liabilities and stockholders' equity Net income. 850,000 200.000 Accounts payable... Dividends (160,000) (60,000) Accrued liabilities Ending retained earnings ... $3,490,000 $ 940,000 Long-term liabilities. Common stock APIC.. Retained earnings $ 220,000 $ 100,000 340,000 180,000 450,000 430,000 600,000 150,000 2,100,000 200,000 3,490,000 940,000 $7,200,000 $2,000,000 a. Prepare the journal entry to record the acquisition of the subsidiary. b. Show the computations to yield the equity income of $150,000 reported by the parent in its income statement Show the computations to yield the Equity Investment reported by the parent in the amount of $1,860,000. d. Prepare the consolidation entries for the year ended December 31, 2019. Prepare the consolidated spreadsheet for the year ended December 31, 2019. f. What additional assets have been recognized on the consolidated balance sheet that were not explicitly reported on the balance sheets of either the parent or the subsidiary? Why were they not previously reported in pre-acquisition financial statements of the parent or the subsidiary? e

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