On January 1, 2014, Palka, Inc., acquired 70 percent of the outstanding shares of Sellinger Company...

On January 1, 2014, Palka, Inc., acquired 70 percent of the outstanding shares of Sellinger Company for $1,290,800 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 $1,570,000. 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 $264,000. On January 1, 2015, Palka acquired an additional 25 percent common stock equity interest in Sellinger Company for $475,000 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:

	2014	2015
Net income	$ 480,000	$ 593,000
Dividends	200,000	240,000

a.	Prepare Palka’s journal entry to record its January 1, 2015, 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.)

b.	Prepare a schedule showing Palka’s December 31, 2015, equity method balance for its Investment in Sellinger account. (Amounts to be deducted should be indicated with a minus sign.)

Solutions

Expert Solution

a. Journal Entries in the books of Palka, Inc

Date	Particulars		Debit ($)	Credit ($)
1st Jan 2015	Investment in Sellinger Company A/c	Dr	475,000
	To Cash			475,000

Being 25% additional stake acquired in Sellinger Company for $ 475,000.

b. Statement of balance in Shellinger Account via Equity Method.

Particulars	Amount ($)
As on January 1st, 2014 (Purchase of 75% stake)	1,290,800
Add:
Share of net income for year ending 2014 (480k*70%)	336,000
Less:
Dividend received for year ending 2014 (200k*70%)	(140,000)

Equity Method Balance as on 31st December, 2014	1,612,800

Add:
Purchase of 25% stake (Total 95%) on January 1st, 2015	475,000
Share of net income for year ending 2014 (593k*95%)	563,350
Less:
Dividend received for year ending 2014 (240k*95%)	(-228,000)
Equity Method Balance as on 31st December, 2015	2,297,150

It is assumed equity method balance without fair value adjustment.

Answer would be different if fair value adjustment was required

ekkarill92 answered 1 year ago

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