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				$	57,600
Accounts receivable	$	40,600
Additional paid-in capital					50,000
Buildings (net) (4-year remaining life)		126,000
Cash and short-term investments		65,750
Common stock					250,000
Equipment (net) (5-year remaining life)		390,000
Inventory		100,000
Land		110,000
Long-term liabilities (mature 12/31/20)					187,500
Retained earnings, 1/1/17					306,850
Supplies		19,600
Totals	$	851,950		$	851,950

During 2017, Abernethy reported net income of $108,500 while declaring and paying dividends of $14,000. During 2018, Abernethy reported net income of $139,750 while declaring and paying dividends of $54,000.

Assume that Chapman Company acquired Abernethy’s common stock for $711,320 in cash. Assume that the equipment and long-term liabilities had fair values of $411,450 and $155,580, respectively, on the acquisition date. Chapman uses the initial value method to account for its 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.)

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

2

Prepare entry A to recognize allocations determined above in connection with acquisition-date fair values.

3

Prepare entry I to eliminate intra-entity dividend declarations recorded by parent as income.

4

Prepare entry E to recognize 2017 amortization expense.

5

Prepare entry *C to convert parent company figures to equity method by recognizing subsidiary's increase in book value for prior year [$80,000 net income less $10,000 dividend declaration] and excess amortizations for that period [$11,500].

6

Prepare entry S to eliminate beginning of year stockholders' equity accounts of subsidiary. The retained earnings balance has been adjusted for 2017 net income and dividends.

7

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

8

Prepare entry I to eliminate intra-entity dividend declarations recorded by parent as income.

9

Prepare entry E to recognize 2018 amortization expense.

Answer 1

Acquisition-date allocation and annual excess fair value amortizations:

      Acquisition date value (consideration paid) ................       $711,320

      Book value .....................................................................      (606,850)

      Excess price paid over book value .............................       $104,470

            Excess price paid assigned to specific        Remaining                    Annual excess

            accounts based on fair values                                    life                     amortizations

           

                  Equipment                                $ 21,450                5 yrs.                        $4,290

                  Long‑term liabilities                    31,920                4 yrs.                          6,384

                  Goodwill                                      51,100            indefinite                          -0-

                        Total                                    $104,470                                               $10,674

           

Consolidation entries as of December 31, 2017

            Entry S

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

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

                  Retained earnings—1/1/17 ..........................................           306,850

                        Investment in Abernethy.......................................                                606,850

                  (To eliminate stockholders' equity accounts of subsidiary)

            Entry A

                  Equipment ....................................................................             21,450

                  Long-term liabilities ....................................................             31,920

                  Goodwill .......................................................................             51,100

                        Investment in Abernethy ......................................                                104,470

(To recognize allocations determined above in connection with acquisition-date fair values)

            Entry I

                  Dividend income ..........................................................             14,000

                        Dividends declared ...............................................                                  14,000

(To eliminate intra-entity dividend declarations recorded by parent as income)

            Entry E

                  Depreciation expense .................................................               4,290                    

                  Interest expense...........................................................               6,384

                        Equipment...............................................................                                    4,290

                        Long-term liabilities...............................................                                    6,384

                  (To recognize 2017 amortization expense)

            Consolidation Entries as of December 31, 2018

            Entry *C

                  Investment in Abernethy ............................................             83,826

                        Retained earnings—1/1/15 (Chapman) ...............                                  83,826

(To convert parent company figures to equity method by recognizing subsidiary's increase in book value for prior year [$108,500 net income less $14,000 dividend declaration] and excess amortizations for that period [$10,674])

            Entry S

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

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

                  Retained earnings—1/1/15 .........................................            701350

                        Investment in Abernethy ......................................                             1,001,350

(To eliminate beginning of year stockholders' equity accounts of subsidiary. The retained earnings balance has been adjusted for 2014 net income and dividends)

            Entry A    

                  Equipment ....................................................................             17,160

                  Long-term liabilities ....................................................             25,536

                  Goodwill .......................................................................              51100

                        Investment in Abernethy ......................................                                   93796

(To recognize allocations relating to investment—balances shown here are as of the beginning of the current year [original allocation less excess amortizations for the prior period])

            Entry I

                  Dividend income .........................................................             54,000

                              Dividends declared .........................................                                  54,000

(To eliminate intra-entity dividend declarations recorded by parent as income)

            Entry E

                  Same as Entry E for 2017