On January 1, 2020, Parent Company acquired 100% of the common stock of Subsidiary Company in a stock exchange

On this date Subsidiary had total owners' equity of $550,000 and book value approximated fair value.

During 2020 and 2021, Parent has accounted for its investment in Subsidiary using the simple equity method.

On January 1, 2021, Parent held merchandise acquired from Subsidiary for $75,000 . During 2021, Subsidiary sold merchandise to Parent for $100,000, of which $25,000 is held by Parent on December 31, 2021 . Subsidiary's usual gross profit on affiliated sales is 50%.

On December 31, 2020, Parent sold to Subsidiary some equipment with a cost of $75,000 and a book value of $30,000 . The sales price was $40,000 . Subsidiary is depreciating the equipment over a 5-year life, assuming no salvage value and using the straight-line method.

Parent and Subsidiary qualify as an affiliated group for tax purposes and thus will file a consolidated tax return. Assume a 30% corporate income tax rate.

Required:

Complete the Figure 6-10 worksheet for consolidated financial statements for the year ended December 31, 2021.

Figure 6-10

Trial Balance Eliminations and

Parent Sub. Adjustments
Account Titles Company Company Debit Credit
Inventory, December 31 100,000 60,000

Other Current Assets 374,000 520,000

Investment in Sub. Company 740,000

Land 240,000 120,000

Buildings and Equipment 515,000 380,000

Accumulated Depreciation (120,000) (140,000)

Current Liabilities (150,000) (50,000)

Long-Term Liabilities (200,000) (150,000)

Common Stock – P Co. (300,000)

Other Paid-in Capital – P Co. (300,000)

Retained Earnings – P Co. (679,000)

Common Stock – S Co.
(50,000)

Other Paid-in Capital – S Co.
(200,000)

Retained Earnings – S Co.
(350,000)

Net Sales (600,000) (500,000)

Cost of Goods Sold 360,000 200,000

Operating Expenses 120,000 150,000

Subsidiary Income (150,000)

Dividends Declared – P Co. 50,000

Dividends Declared – S Co.
10,000

0 0

Consol.
Control. Consol.

Income
Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory, December 31

Other Current Assets

Investment in Sub. Company

Land

Buildings and Equipment

Accumulated Depreciation

Current Liabilities

Long-Term Liabilities

Common Stock – P Co.

Other Paid-in Capital – P Co.

Retained Earnings – P Co.

Common Stock – S Co.

Other Paid-in Capital – S Co.

Retained Earnings – S Co.

Net Sales

Cost of Goods Sold

Operating Expenses

Subsidiary Income

Dividends Declared – P Co.

Dividends Declared – S Co.

For the worksheet solution, please refer to Answer 6-10.

Answer 6-10

Trial Balance Eliminations and

Parent Sub. Adjustments
Account Titles Company Company Debit Credit
Inventory, December 31 100,000 60,000

EI 12,500
Other Current Assets 374,000 520,000

Investment in Sub. Company 740,000

CY 140,000

EL 600,000

Land 240,000 120,000

Buildings and Equipment 515,000 380,000

Accumulated Depreciation (120,000) (140,000) F2 2,000 F1 10,000

Long-Term Liabilities (200,000) (150,000)

Common Stock – P Co. (300,000)

Other Paid-in Capital – P Co. (300,000)

Retained Earnings – P Co. (679,000)
BI 37,500

F1 10,000

Common Stock – S Co.
(50,000) EL 50,000

Other Paid-in Capital – S Co.
(200,000) EL 200,000

Retained Earnings – S Co.
(350,000) EL 350,000

Net Sales (600,000) (500,000) IS 100,000

Cost of Goods Sold 360,000 200,000 EI 12,500 BI 37,500

IS 100,000
Operating Expenses 120,000 150,000

F2 2,000

Subsidiary Income (150,000)
CY 150,000

Dividends Declared – P Co. 50,000

Dividends Declared – S Co.
10,000

CY 10,000

Consolidated Income before Tax

Provision for Income Tax

T 89,100

Income Taxes Payable

T 89,100

Consolidated Net Income

To NCI

To Controlling Interest

Total NCI

Ret. Earn. Contr. Int. 12-31

0 0
1,001,100
1,001,100

Consol.
Control. Consol.

Income
Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory, December 31

147,500
Other Current Assets

894,000
Investment in Sub. Company

0

Land

360,000
Buildings and Equipment

895,000
Accumulated Depreciation

(268,000)

Current Liabilities

(200,000)
Long-Term Liabilities

(350,000)

Common Stock – P Co.

(300,000)
Other Paid-in Capital – P Co.

(300,000)
Retained Earnings – P Co.

(631,500)

Other Paid-in Capital – S Co.

Retained Earnings – S Co.

Net Sales (1,000,000)

Cost of Goods Sold 435,000

Operating Expenses 268,000

Subsidiary Income 0

Dividends Declared – P Co.

50,000

Dividends Declared – S Co.

Consolidated Income before Tax (297,000)

Provision for Income Tax 89,100

Income Taxes Payable

(89,100)

Consolidated Net Income (207,900)

To NCI 0

To Controlling Interest 207,900
(207,900)

Total NCI

0
Ret. Earn. Contr. Int. 12-31

(789,400) (789,400)

0

Eliminations and Adjustments:

CY Eliminate the current-year entries made in the investment account and in the subsidiary income account.

EL Eliminate 100% of Subsidiary Company equity balances at the beginning of the year against the investment account.

BI Eliminate the $37,500 of gross profit in the beginning inventory. ($75,000 x 50%)

IS Eliminate the entire intercompany sales of $100,000 .

EI Eliminate the $12,500 of gross profit in the ending inventory. ($25,000 x 50%)

F1 Eliminate the $10,000 gain on sale of equipment against retained earnings of Parent.
($40,000 - $30,000)

F2 Eliminate the $2,000 of excess depreciation for 2021 on the transferred equipment.
($10,000 / 5)

T Record provision for income tax, calculated as follows:

Consolidated income before tax $297,000

Corporate tax rate 30%

Tax liability $ 89,100