I am attempting to study for an exam for tomorrow and cannot figure out the equity method entries up to 2006 for this problem, can someone please help!

Parent Corporation owns 80% of Subsidiary Corporation’s outstanding common stock that was purchased at book value and fair value on January 1, 1999.

Additional information:

1. Parent sold inventory items that cost $3,000 to Subsidiary during 2006 for $6,000. One-half of this merchandise was inventoried by Subsidiary at year-end. At December 31, 2006, Subsidiary owed Parent $2,000 on account from the inventory sales. No other intercompany sales of inventory have occurred since Parent acquired its interest in Subsidiary.

2.Parent sold a plant asset with a book value of $5,000 and a 5-year useful life to Subsidiary for $10,000 on December 31, 2004. This plant asset remains in use by Subsidiary and is depreciated by the straight-line method.

3.On January 2, 2006, Subsidiary paid $10,800 for $10,000 par value of Parent’s 10-year, 10% bonds. These bonds have interest payment dates of January 1 and July 1, and mature on January 1, 2010. Straight-line amortization has been applied by Subsidiary to the Parent bond investment.

To determine the equity method entries up to 2006, we need to understand the concept of the equity method and apply it to the given information.

The equity method is used when one company, the parent, has significant influence over another company, the subsidiary. The parent must own between 20% and 50% of the subsidiary's outstanding common stock to apply this method.

1. Intercompany Sales of Inventory:
When the parent sells inventory to the subsidiary, we need to eliminate both the revenue and cost of goods sold associated with that sale to avoid double counting. In this case, the parent sold inventory items that cost $3,000 to the subsidiary for $6,000. Half of the merchandise remained in the subsidiary's inventory at year-end, which means $1,500 in cost needs to be eliminated. Additionally, the subsidiary owed the parent $2,000 on account for the inventory sales.

The equity method entry for this transaction would be:
Debit: Subsidiary Inventory $1,500 (to eliminate the remaining cost in inventory)
Credit: Parent Equity in Subsidiary Income $1,500 (to eliminate the revenue portion)
Debit: Subsidiary Accounts Payable $2,000 (to eliminate the accounts payable owed to the parent)
Credit: Parent Investment in Subsidiary $2,000 (to recognize the subsidiary's liability to the parent)

2. Intercompany Sale of Plant Asset:
When the parent sells a plant asset to the subsidiary, we need to eliminate the gain or loss on the sale and adjust the depreciation expense for the subsidiary. The parent sold a plant asset with a book value of $5,000 to the subsidiary for $10,000 on December 31, 2004.

The equity method entry for this transaction would be:
Debit: Parent Investment in Subsidiary $5,000 (to eliminate the parent's asset transfer)
Credit: Subsidiary Accumulated Depreciation $5,000 (to eliminate the depreciation recorded by the subsidiary)
Debit: Subsidiary Depreciation Expense $1,000 (to adjust the depreciation for subsequent years)
Credit: Subsidiary Accumulated Depreciation $1,000 (to recognize the depreciation expense on the transferred asset)

3. Bond Investment:
When the subsidiary purchases bonds issued by the parent, we need to account for the initial investment and the subsequent interest income. On January 2, 2006, the subsidiary paid $10,800 for $10,000 par value of the parent's bonds.

The equity method entry for this transaction would be:
Debit: Subsidiary Investment in Parent Bonds $10,800 (to recognize the initial bond investment)
Credit: Parent Bonds Payable $10,000 (to eliminate the bond liability)
Credit: Parent Bond Interest Revenue $800 (to recognize the subsidiary's share of the bond's interest income)

These are the equity method entries up to 2006 based on the given information. Make sure to adjust these entries for any subsequent events or changes in the ownership percentage if applicable.