Question

Chapman Company obtains 100 percent of Abernethy Company’s stock on January 1, 2017. As of that date, Abernethy has the following trial balance:

	Debit			Credit
Accounts payable				$	50,000
Accounts receivable	$	40,000
Additional paid-in capital					50,000
Buildings (net) (4-year remaining life)		120,000
Cash and short-term investments		60,000
Common stock					250,000
Equipment (net) (5-year remaining life)		200,000
Inventory		90,000
Land		80,000
Long-term liabilities (mature 12/31/20)					150,000
Retained earnings, 1/1/17					100,000
Supplies		10,000
Totals	$	600,000		$	600,000

During 2017, Abernethy reported net income of $80,000 while declaring and paying dividends of $10,000. During 2018, Abernethy reported net income of $110,000 while declaring and paying dividends of $30,000.

Assume that Chapman Company acquired Abernethy’s common stock for $500,000 in cash. Assume that the equipment and long-term liabilities had fair values of $220,000 and $120,000, respectively, on the acquisition date. Chapman uses the initial value method to account for its investment.

Answer 1

Step 1: Determine Annual Excess Amortizations:

The value of annual excess amortizations is arrived as below:

Excess of Consideration Paid over Book Value = 500,000 - (50,000 + 250,000 + 100,000) = $400,000

This excess value of $100,000 will get allocated and amortized as follows:

		Remaining Life/Maturity	Annual Excess Amortizations
Equipment (220,000 - 200,000)	20,000	5 Years	4,000 (20,000/5)
Long-Term Liabilities (150,000 - 120,000)	30,000	4 Years	7,500 (30,000/4)
Goodwill (100,000 - 20,000 - 30,000)	50000	Indefinite	0
Total	100,000		11,500

_____

Step 2: Consolidation Worksheet Entries for 2017 and 2018:

The consolidation worksheet entries for the 2 years are prepared as below:

	Debit	Credit
Consolidation Entries as of December 31, 2017
Entry S
Common Stock-Abernethy	$250,000
Additional Paid-in Capital	$50,000
Retained Earnings-1/1/2017	$100,000
Investment in Abernethy		$400,000
(To eliminate stockholder's equity accounts of subsidiary)
Entry A
Equipment	$20,000
Long-Term Liabilities	$30,000
Goodwill	$50,000
Investment in Abernethy		$100,000
(To allocate excess of consideration paid over book value)
Entry I
Dividend Income	$10,000
Dividends Paid		$10,000
(To eliminate intercompany dividend payments recorded by parent company as income)
Entry E
Depreciation Expense	$4,000
Interest Expense	$7,500
Equipment		$4,000
Long-Term Liabilities		$7,500
(To record amortization expense for 2017)
Consolidation Entries as of December 31, 2018
Entry*C
Investment in Abernethy (80,000 - 10,000 - 11,500)	$58,500
Retained Earnings-1/1/2018 (Chapman)		$58,500
(To record conversion of parent company figures to equity method)
Entry S
Common Stock-Abernethy	$250,000
Additional Paid-in Capital	$50,000
Retained Earnings-1/1/2017	$170,000
Investment in Abernethy		$470,000
(To eliminate opening stockholder's equity accounts of subsidiary)
Entry A
Equipment (20,000 - 4,000)	$16,000
Long-Term Liabilities (30,000 - 7,500)	$22,500
Goodwill	$50,000
Investment in Abernethy		$1,00,000
(To recognize allocations relating to investment-balances)
Entry I
Dividend Income	$10,000
Dividends Paid		$10,000
(To eliminate intercompany dividend payments recorded by parent company as income)
Entry E
Depreciation Expense	$4,000
Interest Expense	$7,500
Equipment		$4,000
Long-Term Liabilities		$7,500
(To record amortization expense for 2018)