Question
In: Accounting
On January 1, 2017, Palka, Inc., acquired 70 percent of the outstanding shares of Sellinger Company...
On January 1, 2017, Palka, Inc., acquired 70 percent of the outstanding shares of Sellinger Company for $1,789,900 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 $2,250,000. 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 $297,000. On January 1, 2018, Palka acquired an additional 25 percent common stock equity interest in Sellinger Company for $665,625 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:
| 2017 | 2018 | |||||
| Net income | $ | 465,000 | $ | 577,000 | ||
| Dividends declared | 150,000 | 190,000 | ||||
Show Palka’s journal entry to record its January 1, 2018, acquisition of an additional 25 percent ownership of Sellinger Company shares.
Prepare a schedule showing Palka’s December 31, 2018, equity method balance for its Investment in Sellinger account.
Solutions
Expert Solution
1.
| Date | Account Titles | Debit | Credit |
| Jan 1, 2018 | Investment in Sellinger Co | 705625 | |
| Cash | 665625 | ||
| Additional paid in capital - Sellinger Co | 40000 |
Workings:
| Fair value of shares outstanding on the date of acquisition | [1,789,900/70%] | 2557000 |
| Add: Net Income | 465000 | |
| Less: Dividends declared | 150000 | |
| Less:Patents amortized | [297000/6] | 49500 |
| Fair value as on date of acquisition | 2822500 | |
| Value of investment for additional shares acquired | [2822500*25%] | 705625 |
2.
| Fair value of acquisition as on Jan 1,2017 | 1,789,900 | |
| Add: Adjusted net income | [415500*70%] | 290850 |
| Less: Dividends | [150000*70%] | 105000 |
| Investment balance as on Dec 31, 2017 | 1,975,750 | |
| Add: Additional Investment | 705625 | |
| Add: Adjusted net income | [527500*95%] | 501125 |
| Less: Dividends | [190000*95%] | 180500 |
| Investment balance as on Dec 31, 2018 | 3,002,000 |
Workings:
| 2017 | ||
| Net Income | 465000 | |
| Less:Patents amortized | [297000/6] | 49500 |
| Adjusted net income | 415500 | |
| 2018 | ||
| Net Income | 577000 | |
| Less:Patents amortized | [297000/6] | 49500 |
| Adjusted net income | 527500 | |
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