Question

Public Corporation acquired 90 percent of Station Company’s voting common stock on January 1, 20X1, for $502,200. At the time of the combination, Station reported common stock outstanding of $129,000 and retained earnings of $384,000, and the fair value of the noncontrolling interest was $55,800. The book value of Station’s net assets approximated market value except for patents that had a market value of $45,000 more than their book value. The patents had a remaining economic life of five years at the date of the business combination. Station reported net income of $65,000 and paid dividends of $24,000 during 20X1.

Required:
a. What balance did Public report as its investment in Station at December 31, 20X1, assuming Public uses the equity method in accounting for its investment?

	Balance in investment account

b. Prepare the consolidation entry or entries needed to prepare consolidated financial statements at December 31, 20X1. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

a. Record the basic consolidation entry.

b. Record the amortized excess value reclassification entry.

c. Record the excess value (differential) reclassification entry.

Answer 1

Solution:

a)

	Major corporation 90% share	Non Controlling interest 10% share	Total
Fair value of consideration	$502,200	$55,800	$558,000
Less: Book value of station company
Common stock	$116,100	$12,900	$129,000
Retained earnings	$345,600	$38,400	$384,000
Excess of fair value over book value	$40,500	$4,500	$45,000
Excess value assigned to patent	$40,500	$4,500	$45,000

Calculation of Amortization patent:

Excess value of patent	$45,000
Life of patent	5 years
Amortization per year (45,000/5)	$9,000
Value of patent 12/31/20X1 ($45,000 -$9,000)	$36,000

Net income of station company	$65,000
Less: Amortization expenses	(9,000)
Adjusted net income of Station company	$56,000
Share of major corporation 90%	$50,400
Share of non controlling interest 10%	$5,600

Calculation of major investment in station company:

Fair value of consideration tarnsferred	$502,200
Add: Share in Station company net income ($65,000*90%)	$58,500
Less: Share in patents Amortization (9,000*90%)	($8,100)
Less: Dividend paid by station company($24,000*90%)	($21,600)
Balance in investment account December 31,20X1	$531,000

b)

Consildation entries:

No	Account title and explanation	Debit	Credit
1	Income from subsidiary	$50,400
	Dividend declared($24,000*90%)		$21,600
	Investment in station company		$28,800
	(To eliminate the income from subsidiary account)
2	Income to non controlling interest	$5,600
	Dividend declared ($24,000*10%)		$2,400
	Non controlling interest		$3,200
	(To record assiging income to non controlling interest)
3	Common stock	$129,000
	Retained earnings	$384,000
	Investment in station company (90%)		$461,700
	Non controlling interest(10%)		$51,300
	(To eliminate the investment balance)
4	Patents	$36,000
	Investment in station company (90%)		$32,400
	Non controlling interest(10%)		$3,600
	(To eliminate the investment balance by recording excess value of patent as on 12/31/20X1)
5	Amortization expenses	$9,000
	Investment in station company (90%)		$8,100
	Non controlling interest(10%)		$900
	(To eliminate the investment balance by recording amortization expenses during the year)

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