Question

Chapman Company obtains 100 percent of Abernethy Company’s stock on January 1, 2017. As of that date, Abernethy has the following trial balance:

	Debit			Credit
Accounts payable				$	58,000
Accounts receivable	$	40,200
Additional paid-in capital					50,000
Buildings (net) (4-year remaining life)		170,000
Cash and short-term investments		66,750
Common stock					250,000
Equipment (net) (5-year remaining life)		372,500
Inventory		109,500
Land		116,000
Long-term liabilities (mature 12/31/20)					165,000
Retained earnings, 1/1/17					369,150
Supplies		17,200
Totals	$	892,150		$	892,150
During 2017, Abernethy reported net income of $106,500 while declaring and paying dividends of $13,000. During 2018, Abernethy reported net income of $142,750 while declaring and paying dividends of $51,000. Assume that Chapman Company acquired Abernethy’s common stock for $759,900 in cash. As of January 1, 2017, Abernethy’s land had a fair value of $126,400, its buildings were valued at $211,600, and its equipment was appraised at $344,500. Chapman uses the equity method for this investment. Prepare consolidation worksheet entries for December 31, 2017, and December 31, 2018. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

1. Prepare entry S to eliminate stockholders' equity accounts of subsidiary.

2. Prepare entry A to recognize allocations attributed to fair value of specific accounts at acquisition date with residual fair value recognized as goodwill.

3. Prepare entry I to eliminate $106,500 income accrual for 2017 less $4,800 amortization recorded by parent using equity method.

4. Prepare entry D to eliminate intra-entity dividend transfers.

5. Prepare entry E to recognize current year amortization expense.

6. Prepare entry S to eliminate beginning stockholders' equity of subsidiary—the Retained Earnings account has been adjusted for 2017 income and dividends. Entry *C is not needed because equity method was applied.

7. Prepare entry A to recognize allocations relating to investment—balances shown here are as of beginning of current year [original allocation less excess amortizations for the prior period].

8. Prepare entry I to eliminate $142,750 income accrual less $4,800 amortization recorded by parent during 2018 using equity method.

9. Prepare entry D to eliminate intra-entity dividend transfers.

10. Prepare entry E to recognize current year amortization expense.

Answer 1

Solution:

1.

Entry S

                  Common stock—Abernethy.........................................         250,000

                  Additional paid-in capital .........................................         50,000

                  Retained earnings—1/1/17 ...................................... 369,150

                        Investment in Abernethy .................................... 669,150

                  (To eliminate stockholders' equity accounts of subsidiary)

2. Entry A

                  Land ..............................................................................          10,400

                  Buildings ........................................................................           41,600

                  Goodwill .......................................................................          66,750

                        Equipment .............................................................                               28,000

                        Investment in Abernethy ....................................                               90,750

(To recognize allocations attributed to fair value of specific accounts at acquisition date with residual fair value recognized as goodwill).

3. Entry I

                  Equity in subsidiary earnings ................................. 101,700

                        Investment in Abernethy .................................... 101,700     

                  (To eliminate $106,500 income accrual for 2017 less $4,800 amortization

                  recorded by parent using equity method)

4. Entry D

                  Investment in Abernethy ..........................................          13,000

                        Dividends declared .............................................                               13,000

                  (To eliminate intra-entity dividend transfers)