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