Delta Company purchased all of the voting stock of Alpha Company on January 1, 19×2, for $400,000.Delta Company uses the cost method of accounting…

Delta Company purchased all of the voting stock of Alpha Company on January 1, 19×2, for $400,000.Delta Company uses the cost method of accounting for its investment in Alpha Company. At the date of acquisition, the book values of all Alpha Company assets and liabilities were exactly equal to their fair market values, with the exception of Plant Assets which were undervalued $40,000. Any goodwill is to be amortized over the maximum period permissible. All depreciable assets on both sets of records are being depreciated uniformly over a 20-year period beginning on January 1, 19×2, with noestimated salvage value.During 19×2 Alpha Company had a loss of $20,000 and paid no dividends. During 19×2 and 19×3, Alpha Company sold merchandise to Delta Company at a markup of 25% of cost. The amounts charged Delta Company by Alpha Company were $60,000 and $80,000, respectively. At the end of 19×2, Delta Company’s ending inventory, all sold in 19×3, included goods valued at $25,000 which were aquired

 from Alpha Company, and at the end of 19×3 the corresponding figure was $20,000.Delta Company acquired $100,000, 8%, Alpha Company bonds on January 1, 19×2, shortly after the stock was purchased.At that time the market value of the bonds was equal to par. Interest is paid annually on December 31.

Complete the accompanying consolidating work sheet,using trial balances for 19×3. Include notes to explain the entries.

DELTA COMPANY

Consolidating Work Sheet

December 31, 19×3

Account Title Delta Company Alpha Company

Inventory $ 200,000 $ 50,000

Other Current Assets 400,000 200,000

Plant Assets (Net) 1,000,000 400,000

Investment in Alpha

Company 400,000

Investment in Alpha Bonds 100,000

Cost of Goods Sold 4,000,000 800,000

Depreciation Expense 200,000 50,000

Interest Expense 40,000

Other Expense 600,000 80,000

Current Liabilities (300,000)

Bonds Payable (500,000)

Sales (5,500,000) (980,000)

Interest Income (8,000)

Paid-in Capital-Delta (100,000)

Paid-in Capital-Alpha ( 40,000)

Retained Earnings-Delta (992,000)

Retained Earnings-Alpha (100,000)

0 0

2. (10 points) If a parent company uses the equity method

of accounting for its investment in a subsidiary rather

than the cost method, what effect will this have on the final

figures of the consolidated financial statements?

Why?

2

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