Question

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Chapman Company obtains 100 percent of Abernethy Company’s stock on January 1, 2020. As of that...

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

Solutions

Expert Solution

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

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