On January 1, 2019, P Co. acquired 80 percent of S Co. for $400,000 cash. S...

On January 1, 2019, P Co. acquired 80 percent of S Co. for $400,000 cash. S reported net income of $20,000 and dividends of $3,000 for 2019. On the date of acquisition, S reported common stock outstanding of $350,000 and retained earnings of $50,000. It held land with a book value of $180,000 and a market value of $200,000, and equipment with a book value of $80,000 and a market value of $98,000 at the date of combination. The remainder of the differential at acquisition was attributable to an increase in the value of patents, which had a remaining useful life of ten years. All depreciable assets held by S at the date of acquisition had a remaining economic life of eight years. P uses the equity method in accounting for its investment in S.

Required:

Provide the journal entries recorded by P during 2019 on its books if it accounts for its investment in S.
Provide all consolidation entries needed at December 31, 2019, to prepare consolidated financial statements.

Solutions

Expert Solution

Requirement 1

Book Value of Net Asset (350,000 + 50,000)	$400,000
Add: Excess of Fair Value over book value
Land	$20,000
Equipment	$18,000
Total	$438,000

P Company's share = $438,000 * 80% = $350,400

Amount paid by P to acquire 80% of S = $400,000

Therefore amount attributable to Patents out of P's share = $400,000 - $350,400 = $49,600

Therefore total value of Patent = $49600 / 80% = 62,000

Journal Entry in the books of P

Date	Accounts	Debit	Credit
January 1, 2019	Investment	$400,000
	Cash		$400,000
	(to record purchase of S for cash)

December 31, 2019	Investment	$16000
	Equity in earning (I/S)		$16000
	(to record subsidiary income)

December 31, 2019	Cash	$2,400
	Investment		$2,400
	(to record the receipt of dividend)

December 31, 2019	Equity in Earnings (I/S)	$1,800
	Investment		$1,800
	( Depreciation of excess FV of equipment)

December 31, 2019	Equity in Earnings (I/S)	$4,960
	Investment		$4,960
	( Amortization of Patent)

Requirement 2

Consolidation entries

Date	Accounts	Debit	Credit
December 31, 2019	Common Stock - Sub	350,000
	Retained Earning - Sub	67,000
	Excess FV over BV	35,750
	Patent	55,800
	Investment in Sub		406840
	Non Controlling Interest		101,710

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ekkarill92 answered 1 year ago

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