Question

ON JANUARY 1, 2016 FLORIDA PURCHASED ALL THE OUTSTANDING COMMON SHARES OF SUNSHINE CO FOR $3,500,000 CASH.AT THE DATE OF ACQUISITION, SUNSHINE EQUITY ACCOUNTS HAD THE FOLLOWING BALANCES:

COMMON STOCK$500,000

PAID IN CAPITAL$1,800,000

RETAINED EARNINGS$700,000

ALL OF SUNSHINE'S ASSETS WERE FAIRLY STATED EXCEPT FOR THE FOLLOWING:

EQUIPMENT: BOOK VALUE $180,000, FAIR VALUE $270,000, EST LIFE 5 YEARS

BUILDING: BOOK VALUE $600,000, FAIR VALUE $800,000, EST LIFE 10 YEARS

SUNSHINE ALSO HAD A COPYRIGHT WITH A FAIR VALUE OF $160,000 WITH A REMAINING OF 5 YEARS

DURING 2016, SUNSHINE REPORTED NET INCOME OF $1,325,000 AND PAID DIVIDENDS OF $850,000

DURING 2017, SUNSHINE REPORTED NET INCOME OF $900,000 AND PAID DIVIDENDS OF $1,100,000

REQUIRED:  

A.) ANALYZE THE PURCHASE PRICE AND PREPARE A SCHEDULE ALLOCATING THE PURCHASE PRICE

B.)  ASSUME THAT OHIO USES THE EQUITY METHOD TO ACCOUNT FOR ITS INVESTMENT IN BUCKEYE.  PREPARE ALL JOURNAL ENTRIES TO BE MADE ON ITS BOOKS FOR 2016 AND 2017.  EXPLAIN WHY THE ENTRIES ARE MADE.

C.) PREPARE THE CONSOLIDATION WORKSHEET ENTRIES FOR THE YEAR ENDED 2016 AND 2017.  EXPLAIN WHY THE ENTRIES ARE MADE.

Answer 1

A)Purchase Price of Sunshine Company:

Cash Paid to Buy Sunshine   $3,500,000

Value of Total Assets: -$3,000,000

Less: Higher Value of Equipment: $90,000

Higher VALUE of Building: $2,00,000

Higher Value of COPYRIGHT: $160,000

Value of Goodwill: $50,000

B) 1/1/2016 Investment A/C ...............Dr 3,500,000

To Cash A/C.............Cr 3,500,000

(Investments in Buckeye)

31/12/2016 Dividend A/C.........Dr 8,50,000

To Investment A/C ............Cr   8,50,000

(Dividend Accrued on Investments)

31/12/2016 Investment A/C ...............Dr 13,25,000

To Share in Profit of Investment.............Cr   13,25,000 (Profits earned from the net income of investee company)

31/12/2016 Cash A/C......Dr 8,50,000

To Dividend...........Cr   8,50,000

(Dividends Earned in cash)

31/12/2017 Investments A/C.........Dr 9,00,000

To Share in Net Income of Investment   9,00,000

(Income earned at investments)

31/12/2017 Dividend A/C ...................Dr 11,00,000

To Investment A/C ..................Cr   11,00,000

(Dividend Accrued on investments)

31/12/2017 Cash A/C................Dr 11,00,000

To Dividend A/C...................Cr   11,00,000

(Dividend Received)

Under Equity Method, the investment is treated separately and not consolidated with holding company.

C) CONSOLIDATION WORKSHEET ENTRIES FOR THE YEAR ENDED 2016 AND 2017

1/1/2016 Equipment A/C ............Dr 2,70,000

Building A/C ...............Dr 8,00,000

Copyright A/C..............Dr 1,60,000

Goodwill A/C...............Dr 50,000

Other Assets A/C ......Dr 2,220,000

To Cash A/C 35,00,000

(Cash paid for overall Assets purchased by Florida)

31/12/2016 Depreciation A/C ...........Dr 1,34,000

Amortisation A/C ............Dr 32,000

To Equipment A/C ...................Cr 54,000

To Building A/C.........................Cr 80,000

To Copyright A/C......................Cr 32,000

(Being Depreciation, Amortisation Charged for the year on the fair value)

  

31/12/2017 Depreciation A/C ...........Dr 1,34,000

Amortisation A/C ............Dr 32,000

To Equipment A/C ...................Cr 54,000

To Building A/C.........................Cr 80,000

To Copyright A/C......................Cr 32,000

(Being Depreciation, Amortisation Charged for the year on the fair value)

Under Consolidation Method, since we are consolidating assets we will directly charge depreciation at the year end