Question

Chapman Company obtains 100 percent of Abernethy Company’s stock on January 1, 2020. As of that date, Abernethy has the following trial balance: Debit Credit Accounts payable $ 55,800 Accounts receivable $ 42,500 Additional paid-in capital 50,000 Buildings (net) (4-year remaining life) 209,000 Cash and short-term investments 67,250 Common stock 250,000 Equipment (net) (5-year remaining life) 357,500 Inventory 136,000 Land 114,000 Long-term liabilities (mature 12/31/23) 168,500 Retained earnings, 1/1/20 414,650 Supplies 12,700 Totals $ 938,950 $ 938,950 During 2020, Abernethy reported net income of $104,500 while declaring and paying dividends of $13,000. During 2021, Abernethy reported net income of $137,750 while declaring and paying dividends of $34,000. Assume that Chapman Company acquired Abernethy’s common stock for $849,550 in cash. As of January 1, 2020, Abernethy’s land had a fair value of $128,300, its buildings were valued at $274,600, and its equipment was appraised at $334,750. Chapman uses the equity method for this investment. Prepare consolidation worksheet entries for December 31, 2020, and December 31, 2021.

Answer 1

Answer:

Journal Entries in the books of Chapman Company: (Amounts in $)

Date	Account Title and Explanation	Debit $	Credit $
Jan.1, 2020	1. Chapman Company acquires 100% stock of Abernethy Company
	Investment in Abernethy Co. A/c   Dr.	849,550
	To Cash A/c		849,550
	(Being investment has been made)
Dec.31,2020	2. Investment in Abernethy Co. reported after adjusting post-acquisition profits
	Investment in Abernethy Co. A/c   Dr.	104,500
	To Post-acquisition profits A/c		104,500
	(Being investment in Abernethy co. adjusted by post-acquisition profits of 2020)
Dec.31,2021	3. Investment in Abernethy Co. reported after adjusting post-acquisition profits
	Investment in Abernethy Co. A/c   Dr.	242,250
	To Post-acquisition profits A/c		242,250
	(Being investment in Abernethy co. adjusted by post-acquisition profits of 2021)

Working Note: (Amounts in $)

Computation of Goodwill:

Investment     =          $ 849,550

Less: Common Stock of Abernethy co. =          ($ 250,000)

Less: Pre-acquisition Profits    =          ($ 458,800)

Goodwill    =          $ 140,750

Note: As per Equity Method of Consolidation, we will calculate Goodwill or Capital Reserve normally but it will not affect the double-entry system i.e. there will not be any entry of recording Goodwill/Capital Reserve and it will be disclosed as a footnote of investments.

Note: As per the Equity Method of Consolidation, Investments should be reported in a consolidated statement after revaluation with post-acquisition profits.

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