Question

Chapman Company obtains 100 percent of Abernethy Company’s stock on January 1, 2020. As of that date, Abernethy has the following trial balance:

	Debit			Credit
Accounts payable				$	56,700
Accounts receivable	$	43,800
Additional paid-in capital					50,000
Buildings (net) (4-year remaining life)		143,000
Cash and short-term investments		80,250
Common stock					250,000
Equipment (net) (5-year remaining life)		295,000
Inventory		110,500
Land		112,000
Long-term liabilities (mature 12/31/23)					171,000
Retained earnings, 1/1/20					268,750
Supplies		11,900
Totals	$	796,450		$	796,450

During 2020, Abernethy reported net income of $122,500 while declaring and paying dividends of $15,000. During 2021, Abernethy reported net income of $159,250 while declaring and paying dividends of $49,000.

Assume that Chapman Company acquired Abernethy’s common stock for $698,050 in cash. As of January 1, 2020, Abernethy’s land had a fair value of $123,900, its buildings were valued at $219,400, and its equipment was appraised at $254,500. Chapman uses the equity method for this investment.

Prepare consolidation worksheet entries for December 31, 2020, and December 31, 2021.

Answer 1

Date		Debit	Credit
Dec. 31, 2020
	Common Stock-Abernethy	250,000
	Additional Paid in Capital	50,000
	Retained Earnings, 1/1/2020	268,750
	Investment in Abernethy		568,750
	(to eliminate stockholders’ account of subsidiary)
	Goodwill [698,050 - 568,750]	129,300
	Investment in Abernethy		129,300
	(to recognize goodwill portion of the original acquisition fair value)
	Equity in earnings of subsidiary	122,500
	Investment in Abernethy		122,500
	(to eliminate intercompany income accrual based on the parent’s usage of partial equity method)
	Investment in Abernethy	15,000
	Dividends Paid		15,000
	(to eliminate intra-entity dividend transfers)
	No Journal entry required
	No Journal entry required
	(to recognize current year amortization expense)
Dec. 31, 2021
	No Journal entry required
	No Journal entry required
	Common Stock-Abernethy	250,000
	Additional Paid in Capital	50,000
	Retained Earnings, 1/1/2021 (268,750 + 122,500 - 15,000)	376,250
	Investment in Abernethy		676,250
	(to eliminate beginning stockholders’ equity of subsidiary – the retained earnings account has been adjusted for 2020 income and dividends)
	Goodwill	129,300
	Investment in Abernethy		129,300
	(to recognize goodwill portion of the original acquisition fair value)
	Equity in earnings of subsidiary	159,250
	Investment in Abernethy		159,250
	(to eliminate intercompany income accrual based on the parent’s usage of partial equity method)
	Investment in Abernethy	49,000
	Dividends Paid		49,000
	(to eliminate intra-entity dividend transfers)
	No Journal entry required
	No Journal entry required
	(to recognize current year amortization expense)