Reference no: EM132862357

Question - On January 1, 2021, a parent company acquired 100% of the voting common stock of a subsidiary for $100,000. On the date of acquisition, (1) the subsidiary's net assets had appraised values that approximated their recorded book values and (2) the subsidiary reported Common Stock of $80,000 and Retained Earnings of $20,000. The parent uses the equity method to account for the Investment in the subsidiary. The subsidiary reported net income of $20,000 and paid dividends of $10,000 during 2021.

Required -

1. Prepare the journal entries made on the parent's books during 2021 concerning the Investment in subsidiary.

2. Complete the individual pre-consolidation financial statements for the parent and subsidiary on the working paper (provided on the next page).

3. Given parent and subsidiary individual financial statements completed in requirement 2, determine each of the consolidated balances without proposing consolidating journal entries! This step may be quite challenging, but it is an important exercise if you want to get to the heart of the intuition behind this material.

4. Complete the working paper by preparing the applicable consolidating entries in journal entry form. Hopefully, these entries result in the consolidated balances that you estimated in requirement 3 of this problem.

5. How would the consolidated statements differ if there were $5,000 in intercompany payables?