Question

On January 1, 2017, Palka, Inc., acquired 70 percent of the outstanding shares of Sellinger Company for $1,392,300 in cash. The price paid was proportionate to Sellinger’s total fair value, although at the acquisition date, Sellinger had a total book value of $1,700,000. All assets acquired and liabilities assumed had fair values equal to book values except for a patent (six-year remaining life) that was undervalued on Sellinger’s accounting records by $279,000. On January 1, 2018, Palka acquired an additional 25 percent common stock equity interest in Sellinger Company for $536,250 in cash. On its internal records, Palka uses the equity method to account for its shares of Sellinger.

During the two years following the acquisition, Sellinger reported the following net income and dividends:

	2017			2018
Net income	$	472,500		$	622,500
Dividends declared		150,000			180,000

1. Show Palka’s journal entry to record its January 1, 2018, acquisition of an additional 25 percent ownership of Sellinger Company shares.

2. Prepare a schedule showing Palka’s December 31, 2018, equity method balance for its Investment in Sellinger account.

Show Palka’s journal entry to record its January 1, 2018, acquisition of an additional 25 percent ownership of Sellinger Company shares. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Prepare a schedule showing Palka’s December 31, 2018, equity method balance for its Investment in Sellinger account. (Amounts to be deducted should be indicated with a minus sign.)

Answer 1

Part A

Date	General Journal	Debit	Credit
January 01, 2018	Investment in Sellinger	566250
	Cash		536250
	Additional paid ­in capital		30000

Acquisition-date fair value (1392300/70%)	1989000
Sellinger net income 2017	472500
Excess fair value amortization 2017 (279000/6)	(46500)
Sellinger dividends 2017	(150000)
Acquisition-date adjusted subsidiary value 12/31/17	2265000
Percent acquired 1/1/18	25%
Acquisition-date based value of newly acquired shares	566250
Acquisition price for 25% interest	536250
Credit to Palka’s APIC	30000

Part B

Initial value for 70% acquisition	1392300
70% of adjusted 2017 subsidiary net income (472500-46500)*70%	298200
70% of subsidiary dividends 2017 (150000*70%)	(105000)
Adjusted fair value of newly acquired shares	566250
95% of adjusted subsidiary 2018 net income ($622500-46500)*95%	547200
95% of subsidiary dividends 2018 (180000*95%)	(171000)
Investment in Sellinger 12/31/18	$2527950