Fluent Essays

Complete three exercises in consolidating the financial statements of a subsidiary and parent company. Introduction Financial reporting in the business world has changed quite significantly over the years. The procedures used to consolidate financial information, specifically those generated by separate, distinct companies in a business combination are affected by several factors, including the amount of time that has passed since acquisition and the accounting method applied by the parent company in accounting for the subsidiary. As a result, no single consolidation process can be applied to all business combinations; these must be considered on an individual case-by-case basis. Several factors can add complexity to the consolidation process, specifically when it occurs after the date that the subsidiary is acquired. In all combinations, however, the acquiring company will use a specific accounting method to related to its investment in the acquired company. For combinations being consolidated after the acquisition date, specific procedures are required. Preparation The following resources are required to complete the assessment. Assessment 1 Problems [DOCX]. Assessment 1 Problem Templates [DOCX]. Complete the problems in the Assessment 1 Problems document using the related template, both of which are linked in the Required Resources for this assessment. All financial information and applicable instructions are provided. Problem 1: Journal Entries Prepare all necessary journal entries for an equity investment. Problem 2: Consolidated Balance Sheet Prepare a consolidated balance sheet for an equity investment. Problem 3: Consolidated Balances Determine consolidated asset balances for an equity investment. Analyze equity investment accounting methods. Determine retained earnings balances for an equity investment. Competencies Measured By successfully completing this assessment, you will demonstrate your proficiency in the course competencies through the following assessment scoring guide criteria: Competency 1: Consolidate financial statement information. Prepare all necessary journal entries for an equity investment. Prepare a consolidated balance sheet for an equity investment. Determine consolidated asset balances for an equity investment. Analyze equity investment accounting methods. Determine retained earnings balances for an equity investment. Competency 5: Communicate in a manner that is professional and consistent with expectations for professionals in the field of accounting. Communicate results from accounting calculations accurately and clearly.Assessment 1: Accounting for Equity Investments Problem 1 Equity entries for one year, includes conversion to equity method. Entry One—To record second acquisition of Simon stock: Account Title Debit Credit Entry Two—To restate reported figures for 2019 to the equity method for comparability: Account Title Debit Credit Entry Three—To record income for the year: Account Title Debit Credit Entry Four—To record collection of dividends from Simon: Account Title Debit Credit Entry Five—To record amortization for 2020: Account Title Debit Credit Problem 2 (Prepare a consolidated balance sheet.) Consideration transferred at fair value: Book value: Excess fair over book value: Allocation of excess fair value to specific assets and liabilities: to computer software: to equipment: to client contracts: to in-process research and development: to notes payable: Goodwill Penn Southern Debit Credit Consolidated Cash Receivables Inventory Investment in Spider Computer software Buildings (net) Equipment (net) Client contracts Research and development asset Goodwill Total assets Accounts payable Notes payable Common stock Additional paid-in capital Retained earnings Total liabilities and equities Penn Company and Subsidiary Consolidated Balance Sheet December 31, 2018 Assets Liabilities and Owners’ Equity Cash Accounts payable Receivables Notes payable Inventory Computer software Buildings (net) Equipment (net) Client contracts Research and development asset Common stock Additional paid in capital Goodwill Retained earnings Total assets Total liabilities and equities Problem 3 Consolidated balances three years after the date of acquisition. Includes questions about parents method of recording investment for internal reporting purposes. Acquisition-Date Fair Value Allocation and Amortization: Life (if applicable) Annual Excess Amortizations (if applicable) Consideration transferred 1/1/20 Book value (given) Fair value in excess of book value Allocation to equipment based on difference in fair value aAssessment 1: Accounting for Equity Investments Problem 1 Parker, Inc., acquired 10 percent of Simon Corporation on January 1, 2019, for $462,000 although Simon’s book value on that date was $3,740,000. Simon held land that was undervalued by $220,000 on its accounting records. During 2019, Simon earned a net income of $528,000 while paying cash dividends of $198,000. On January 1, 2020, Parker purchased an additional 30 percent of Simon for $1,320,000. Simon’s land is still undervalued on that date, but then by $264,000. Any additional excess cost was attributable to a trademark with a 10-year life for the first purchase and a 9-year life for the second. The initial 10 percent investment had been maintained at cost because fair values were not readily available. The equity method will now be applied. During 2020, Simon reported income of $660,000 and distributed dividends of $242,000. Prepare all of the 2020 journal entries for Parker. Note: Credits are indicated by parentheses. Problem 2 Penn Company acquired all of Southern, Inc.’s outstanding shares on December 31, 2018, for $1,089,000 cash. Penn will operate Southern as a wholly owned subsidiary with a separate legal and accounting identity. Although many of Southern’s book values approximate fair values, several of its accounts have fair values that differ from book values. In addition, Southern has internally developed assets that remain unrecorded on its books. In deriving the acquisition price, Penn assessed Southern’s fair and book value differences as follows: Book Values Fair Values Computer software $ 44,000 $154,000 Equipment 88,000 66,000 Client contracts –0– 220,000 In-process research and development –0– 88,000 Notes payable (132,000) (143,000) At December 31, 2018, the following financial information is available for consolidation: Penn Southern Cash $79,200 $39,600 Receivables 255,200 111,100 Inventory 308,000 198,000 Investment in Spider 1,089,000 –0– Computer software 462,000 44,000 Buildings (net) 1,309,000 286,000 Equipment (net). 677,600 88,000 Client contracts –0– –0– Goodwill –0– –0– Total assets $4,180,000 $770,000 Accounts payable $(193,600) $(55,000) Notes payable (1,122,000) (132,000) Common stock (836,000) (220,000) Additional paid-in capital (374,000) (55,000) Retained earnings (1,654,400) (308,000) Total liabilities and equities $(4,180,000) $(770,000) Prepare a consolidated balance sheet for Penn and Southern as of December 31, 2018. Problem 3 Pueblo Corporation acquired all of Spartan Company’s outstanding stock on January 1, 2018, for $1,320,000 cash. Spartan’s accounting records reflected net assets on that date of $1,034,000, although equipment with a 10-year life was undervalued on the records by $198,000. Any recognized goodwill is considere