In: Accounting
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 | $ | 57,700 | |||
Accounts receivable | $ | 45,000 | |||
Additional paid-in capital | 50,000 | ||||
Buildings (net) (4-year remaining life) | 124,000 | ||||
Cash and short-term investments | 68,250 | ||||
Common stock | 250,000 | ||||
Equipment (net) (5-year remaining life) | 327,500 | ||||
Inventory | 103,000 | ||||
Land | 106,000 | ||||
Long-term liabilities (mature 12/31/23) | 183,500 | ||||
Retained earnings, 1/1/20 | 252,350 | ||||
Supplies | 19,800 | ||||
Totals | $ | 793,550 | $ | 793,550 | |
During 2020, Abernethy reported net income of $101,000 while declaring and paying dividends of $13,000. During 2021, Abernethy reported net income of $152,000 while declaring and paying dividends of $39,000.
Assume that Chapman Company acquired Abernethy’s common stock for $664,740 in cash. Assume that the equipment and long-term liabilities had fair values of $349,250 and $151,060, respectively, on the acquisition date. Chapman uses the initial value method to account for its investment.
Prepare consolidation worksheet entries for December 31, 2020, and December 31, 2021
Notes: For the year 2020
1.Total Stockholders Equity = Additional Paid in capital + Common Stock + Retained Earnings
= 50,000 + 250,000 + 252,350 = 552,350
2.Difference of Acquisition Price and Total Stockholders Equity = 664,740 - 552,350 = 112,390
3.Equipment Fair Value = 349,250 Book Value = 327,500
Difference = 21,750
4. Long term Liability Fair Value = 151,060 Book Value = 183,500
Difference = 32,440
5. Excess of Fair Value over Book Value = 21,750 + 32,440 = 54,190
6. Goodwill = 112,390 - 54,190 = 58,200
7. Amortization of Equipment = 21,750/5 = 4,350
8. Amortization of Long Term Liability = 32,440/4 = 8,110
9. Total Amortization = 4,350 + 8,110 = 12,460
10. Equity Income = Net Income - Amortization = 101,000 - 12,460 = 88,540
Journal entries
Debit | Credit | |
Common Stock.....Dr. |
250,000 | |
Additional Paid In Capital.....Dr. | 50,000 | |
Retained Earnings.....Dr. | 252,350 | |
To Investment in Company | 552.350 | |
Equipment....Dr. | 21,750 | |
Long Term Liability....Dr. | 32,440 | |
Goodwill....Dr. | 58,200 | |
To Investment in Company | 112,390 | |
Equity Earnings In Company ....Dr. | 88,540 | |
To Investment in Company | 88,540 | |
Dividend Income....Dr. | 13,000 | |
To Dividend Paid | 13,000 | |
Depreciation.....Dr. | 4,350 | |
Interest.....Dr. | 8,110 | |
To Equipment | 4,350 | |
To Long Term Liability | 8,110 |
Notes: For the year 2021
1. Retained Earnings - Dividends - Amortization = 101,000 - 13,000 - 12,460 = 75,540
2. Retained Earnings at the beginning of 2021
= Retained Earnings on 1.1.20 + Net Income of 2020 - Dividends
= 252,350 + 101,000 - 13,000 = 340,350
3. Total Investment = 552,350 + 101,000 - 13,000 = 640,350
4. Balance of Total Fair Value over Book Value - Amortization = 112,390 - 12,460 = 99,930
5. Balance of Fair Value over Book Value for Equipment - Amortization = 21,750 - 4,350 = 17,400
6. Balance of Fair Value over Book Value for Long Term Liability - Amortization = 32,440 - 8,110= 24,330
Journal Entries:
Particulars | Amount ($) | Amount ($) |
Investment in Company .....Dr. | 75,540 | |
To Retained Earnings on 1.1.21 | 75,540 | |
Common Stock.....Dr. | 250,000 | |
Additional Paid In Capital.....Dr. | 50,000 | |
Retained Earnings......Dr. | 340,350 | |
To Investment in Company | 640,350 | |
Equipment.....Dr. | 17,400 | |
Long Term Liability.....Dr. | 24,330 | |
Goodwill.....Dr. | 58,200 | |
To Investment in Company | 99,930 | |
Dividend Income....Dr. | 39,000 | |
To Dividend Paid | 39,000 | |
Depreciation.....Dr. | 4,350 | |
Interest.....Dr. | 8,110 | |
To Equipment | 4,350 | |
To Long Term Liability | 8,110 |