On January 1, 2016, Parent Company Purchased 80% of the Common

Essay

On January 1, 2016, Parent Company purchased 80% of the common stock of Subsidiary Company for $316,000.On this date, Subsidiary had common stock, other paid-in capital, and retained earnings of $40,000, $120,000, and $190,000, respectively.Net income and dividends for 2 years for Subsidiary Company were as follows:
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$$\begin{array} { l r r } & 20 \mathrm { X } 1 & 20 \mathrm { X } 2 \\\text { Net income } & \$ 50,000 & \$ 90,000 \\\text { Dividends } & 10,000 & 20,000\end{array}$$ On January 1, 2016, the only tangible assets of Subsidiary that were undervalued were inventory and building.Inventory, for which FIFO is used, was worth $5,000 more than cost.The inventory was sold in 2016.Building, which was worth $15,000 more than book value, has a remaining life of 8 years, and straight-line depreciation is used.Any remaining excess is goodwill.
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Prepare Parent's 2016 and 2017 journal entries (after the purchase has been recorded) to record the transactions related to its investment in Subsidiary under the
a.cost method
b.simple equity method