Question

QUESTION 14

1. Please use the following question to answer questions 14-20:

   On January 1, 2010, P Company purchased an 80% interest in S Company for $900,000. At that time, S Company had capital stock of $600,000 and retained earnings of $100,000. Differences between the fair value and the book value of the identifiable assets of Salem Company were as follows:

   		Fair Value in Excess of Book Value
   	Equipment	$       180,000
   	Land	20,000
   	Inventory	20,000

   The book values of all other assets and liabilities of S Company were equal to their fair values on January 1, 2010. The equipment had a remaining life of five years. The inventory was sold in 2010.

   S Company’s net income and dividends declared in 2010 Net Income of $120,000; Dividends Declared of $30,000

   14. Prepare JE at date of purchase

QUESTION 15

1. 15. Prepare W/P at date of purchase to eliminate the equity of S and investment of P (see above question)

QUESTION 16

1. 16. Prepare W/P to allocate the differences (see above question)

  

QUESTION 17

1. 17. Prepare J/E under cost method for NI and Dividends (see above question)

  

QUESTION 18

1. 18. Prepare W/P entries to eliminate Dividends and convert cost to equity (see above question)

QUESTION 19

1. 19. Prepare W/P entry to eliminate the equity of S and investment of P at 12/31 (see above question)

  

QUESTION 20

1. 20. Prepare W/P to allocate differences (all inventory has been sold), and the extra depreciation entry (see above question)

Answer 1

Answer :

(14).

Particulars	Debit	Credit
Common stock	$600,000.00	-
Retained Earnings	$100,000.00	-
Difference between book value and implied value	$425,000.00	-
Invesrment in S		$900,000.00
NCI in Equity		$225,000.00
Equipment	$180,000.00	-
Land	$20,000.00	-
Inventory	$20,000.00	-
Difference between book value and implied value		$425,000.00
NCI in Equity		$225,000.00
Loss on acquistion	$430,000.00	-
$425,000 = (900000/0.8)-700000	-	-

(15).

Journal entry on the date of purchase

Date	Particulars	Debit	Credit
01.01.2010	Investment	900,000	-
	Cash	-	900,000
	(To Record purchase of business)	-	-

Journal Entries to eliminate equity S and investment P

Date	Particulars	Debit	Credit
31.12.2010	Investment	96,000	-
	Equity in earnings		96,000
	(To record net income of S)	-	-
31.12.2010	Cash	24,000	-
	Investment		24,000
	(To record dividend received)	-	-
31.12.2010	Equity in earnings	28,800	-
	Investment		28,800
	(To record depreciation of excess FV)	-	-
31.12.2010	Common stock -sub	600,000	-
	Retained earnings	190,000	-
	Excess FV over BV	184,000	-
	Investment in Sub	-	943,200
	Non controlling interest	-	235,800
	Goodwill	205,000	-

(17). Under cost method, the below entries wil be passed for the investment made and dividends received in books of P

Particulars	Debit	Credit
Investment S	900,000	-
Bank	-	900,000
Bank	24,000	-
Dividend income 30,000 * 80%		24,000

Net income is not required to be included in the books of P as under cost method it is not to be included

Since P is holding controlling stake, this may result in consolidation of both P and S accounts where investment, dividend income will be eliminated.

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