In: Accounting
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 | $ | 51,500 | |||
Accounts receivable | $ | 46,500 | |||
Additional paid-in capital | 50,000 | ||||
Buildings (net) (4-year remaining life) | 190,000 | ||||
Cash and short-term investments | 67,750 | ||||
Common stock | 250,000 | ||||
Equipment (net) (5-year remaining life) | 442,500 | ||||
Inventory | 107,000 | ||||
Land | 93,500 | ||||
Long-term liabilities (mature 12/31/20) | 166,500 | ||||
Retained earnings, 1/1/17 | 448,250 | ||||
Supplies | 19,000 | ||||
Totals | $ | 966,250 | $ | 966,250 | |
During 2017, Abernethy reported net income of $99,000 while declaring and paying dividends of $12,000. During 2018, Abernethy reported net income of $151,250 while declaring and paying dividends of $53,000.
Assume that Chapman Company acquired Abernethy’s common stock for $855,330 in cash. Assume that the equipment and long-term liabilities had fair values of $464,600 and $134,620, respectively, on the acquisition date. Chapman uses the initial value method to account for its investment.
Prepare consolidation worksheet entries for December 31, 2017, and December 31, 2018. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
a) Prepare entry S to eliminate stockholders' equity accounts of subsidiary
(b) Prepare entry A to recognize allocations determined above in
connection with acquisition date fair values
(c) prepare entry I to eliminate intra-entity dividend declarations
recorded by parent as income
(d) Prepare entry E to recognize current year amortization
expense
e) prepare entry C* to convert parent company figures to equity
method by recognizing subsidiary increase in book value for prior
year (99,000 net income less 12,000 dividend declaration) and
excess amortizations for that period 12,390)
(f) Prepare entry S to eliminate beginning stockholders' equity of
subsidiary - the retained earnings account has been adjusted for
2017 income and dividends. Entry *C is not needed because equity
method was applied.
(g) Prepare entry A to recognize allocations relating to investment
- balances shown here are as of beginning current year (original
allocation less excess amortizations for the prior period).
(h) Prepare entry I to eliminate intra-entity dividend declarations
by parent as income
(i) Prepare entry E to recognize 2018 amortization expenses
(j) Prepare entry E to recognize current year amortization
expense
Please hit LIKE button if this helped. For any further explanation, please put your query in comment, will get back to you. | Initial Method | |||
Fair value allocation and annual excess amortizations: | ||||
Abernethy fair value (consideration paid) | $ 855,330 | |||
Book value | $-748,250 | |||
Excess fair value over book value (all goodwill) | $ 107,080 | |||
Allocation: | Life | Annual Depreciation | ||
Equipment | $ 22,100 | 5 Year | $ 4,420 | |
Long Term Liabilities | $ 31,880 | 4 Year | $ 7,970 | |
Goodwill | $ 53,100 | $ 12,390 | ||
Account | Debit | Credit | ||
Consolidation Entries as of December 31, 2017 | ||||
Entry S | ||||
Common stock—Abernethy | $ 250,000 | |||
Additional paid-in capital | $ 50,000 | |||
Retained earnings—Abernethy—1/1/17 | $ 448,250 | |||
Investment in Abernethy | $748,250 | |||
(To eliminate stockholders' equity accounts of subsidiary) | ||||
Entry A | ||||
Equipment | $ 22,100 | |||
Goodwill | $ 53,100 | |||
Long Term Liabilities | $ 31,880 | |||
Investment in Abernethy | $107,080 | |||
(To recognize goodwill portion of the original acquisition fair value) | ||||
Entry I | ||||
Dividend Income | $ 12,000 | |||
Dividend Declared | $ 12,000 | |||
(To eliminate intra-entity dividend) | ||||
Entry E | ||||
Depreciation Expense | $ 4,420 | |||
Interest Expense | $ 7,970 | |||
Long Term Liabilities | $ 7,970 | |||
Equipment | $ 4,420 | |||
(To record current year amortization expense) | ||||
Consolidation Entries as of December 31, 2018 | ||||
Entry C | ||||
Investment in Abernethy | $ 74,610 | |||
Retained Earning | $ 74,610 | |||
(To convert equity) (NI 99,000-Div 12,000- Amort 12,390) | ||||
Entry S | ||||
Common stock—Abernethy | $ 250,000 | |||
Additional paid-in capital—Abernethy | $ 50,000 | |||
Retained earnings—Abernethy—1/1/18 (Beg Retained Earning+NI-Div) | $ 531,250 | |||
Investment in Abernethy | $831,250 | |||
(To eliminate beginning of year stockholders' equity accounts) | ||||
Entry A | ||||
Equipment | $ 17,680 | |||
Goodwill | $ 53,100 | |||
Long Term Liabilities | $ 23,910 | |||
Investment in Abernethy | $ 94,690 | |||
(To recognize goodwill portion of the original acquisition fair value) | ||||
Entry I | ||||
Dividend Income | $ 53,000 | |||
Dividend Declared | $ 53,000 | |||
(To eliminate intra-entity dividend) | ||||
Entry E | ||||
Depreciation Expense | $ 4,420 | |||
Interest Expense | $ 7,970 | |||
Long Term Liabilities | $ 7,970 | |||
Equipment | $ 4,420 | |||
(To record current year amortization expense) | ||||