On January 1, 2016, Parent Company Acquired 90% of the Common

Essay

On January 1, 2016, Parent Company acquired 90% of the common stock of Subsidiary Company for $360,000.On this date, Subsidiary had common stock, other paid in capital, and retained earnings of $50,000, $100,000, and $200,000 respectively.Any excess of cost over book value is due to goodwill.Parent uses the simple equity method to account for its investment in subsidiary.
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On January 1, 2017, Parent purchased equipment for $204,110 and immediately leased the equipment to Subsidiary on a 4-year lease.The minimum lease payments of $60,000 are to be made annually on January 1, beginning immediately, for a total of 4 payments.The implicit interest rate is 12%.The lease provides for an automatic transfer of title at the end of 4 years.The estimated useful life of the equipment is 6 years.The lease has been capitalized by both companies.A lease amortization schedule, applicable to either company, is presented below:
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Required:
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Prepare the eliminations and adjustments required by the intercompany lease on the Figure 5-11 partial worksheet as of December 31, 2016.Key and explain all eliminations and adjustments.
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