Question

Equity Method and Eliminating Entries, First Year

On January 1, 2020, Playtel Inc. acquired all of the stock of San Jose Cable for $250 million in cash. At the date of acquisition, Playtel’s shareholders’ equity accounts were as follows (in thousands):

Common stock, $1 par	$5,000
Additional paid-in capital	25,000
Retained deficit	(1,000)
Treasury stock	(800)
Total	$28,200

Both companies have a December 31 year-end. At the date of acquisition, San Jose’s reported net assets had book values approximating fair value. However, it had previously unreported indefinite-life identifiable intangibles valued at $50 million, meeting ASC Topic 805 requirements for capitalization. Impairment losses in 2020 for identifiable intangibles were $1 million. Goodwill from this acquisition was not impaired in 2020. San Jose reported net income of $4 million in 2020, and paid no dividends. Playtel uses the complete equity method to report its investment in San Jose on its own books.

Required

a. Calculate the original amount of goodwill for this acquisiton.

$Answer (in thousands)

b. Calculate equity in net income of San Jose, reported on Playtel’s books in 2020.

$Answer (in thousands)

c. Prepare eliminating entries (C), (E), (R) and (O), required to consolidate Playtel’s trial balance accounts with those of San Jose on December 31, 2020.

Enter numerical answers in thousands.

Ref.	Description		Debit	Credit
(C)	AnswerAdditional paid-in capitalEquity in net income of San JoseGoodwillIdentifiable intangiblesImpairment lossesInvestment in San JoseRetained deficit		Answer	Answer
	AnswerAdditional paid-in capitalEquity in net income of San JoseGoodwillIdentifiable intangiblesImpairment lossesInvestment in San JoseRetained deficit		Answer	Answer
(E)	Common stock, $1 par		Answer	Answer
	AnswerAdditional paid-in capitalEquity in net income of San JoseGoodwillIdentifiable intangiblesImpairment lossesInvestment in San JoseRetained deficit		Answer	Answer
	AnswerAdditional paid-in capitalEquity in net income of San JoseGoodwillIdentifiable intangiblesImpairment lossesInvestment in San JoseRetained deficit		Answer	Answer
	Treasury stock		Answer	Answer
	Investment in San Jose		Answer	Answer
(R)	Identifiable intangibles		Answer	Answer
	AnswerAdditional paid-in capitalEquity in net income of San JoseGoodwillIdentifiable intangiblesImpairment lossesInvestment in San JoseRetained deficit		Answer	Answer
	AnswerAdditional paid-in capitalEquity in net income of San JoseGoodwillIdentifiable intangiblesImpairment lossesInvestment in San JoseRetained deficit		Answer	Answer
(O)	AnswerAdditional paid-in capitalEquity in net income of San JoseGoodwillIdentifiable intangiblesImpairment lossesInvestment in San JoseRetained deficit		Answer	Answer
	AnswerAdditional paid-in capitalEquity in net income of San JoseGoodwillIdentifiable intangiblesImpairment lossesInvestment in San JoseRetained deficit		Answer	Answer

Answer 1

a.	Compute original amount of goodwill as follows:
	Particulars	Amount
	Cost of acquisition	$250,000
	Less: Book value	$28,200
	Excess acquisition cost over book value	$221,800
	Less: Indefinite identifiable intangibles	$50,000
	Goodwill	$171,800
b.	Compute equity in net income s follows:
	Net income reported	$4,000
	Less: Impairment of indefinite identifiable intangibles	$1,000
	Equity in net income of subsidiary	$3,000
c.	Prepare elimination entries as follows:
	Entry C	Debit	Credit
	Equity in net income of subsidiary	$3,000
	Investment in subsidiary		$3,000
	To eliminate equity in net income
	Entry E	Debit	Credit
	Common stock	$5,000
	Additional paid-in capital	$25,000
	Retained earnings		$1,000
	Treasury stock		$800
	Investment in subsidiary		$28,200
	To eliminate beginning equity accounts
	Entry R	Debit	Credit
	Indefinite identifiable intangibles	$50,000
	Goodwill	$171,800
	Investment in subsidiary		$221,800
	To recognize beginning revaluations
	Entry O	Debit	Credit
	Impairment losses	$1,000
	Indefinite identifiable intangibles		$1,000
	To impairment losses