Question

Problem 1

On 1/1/20x1, Petwoud Company acquired 100% of the $1 par value outstanding voting common stock of Supagud, Inc. for a cash payment of $600,000. At the acquisition date, the fair value of Petwoud Company’s common stock was $20 per share. Below is the summary balance sheet information of Supagud, Inc. at acquisition (1/1/20x1):

	Debit	Credit
Accounts payable		60,000
Accounts receivable	50,000
Additional paid-in capital		60,000
Buildings (net) (20-year life)	140,000
Cash and short-term investments	70,000
Common stock		300,000
Equipment (net) (8-year life)	240,000
Intangible assets (indefinite life)	110,000
Land	90,000
Long-term liabilities (mature 12/31/x3)		180,000
Retained earnings, 1/1/x1		120,000
Supplies	20,000
Totals	720,000	720,000
Book value of net equity	480,000

During fiscal year-ending 12/31/20x1 and 12/31/20x2, Supagud, Inc. generated net income and paid dividends as follows:

	Net income	Dividends
20x1	$104,000	$13,000
20x2	$142,000	$30,000

As of 1/1/20x1, Supagud's land had a fair value of $102,000, its buildings were valued at $188,000, and its equipment was appraised at $216,000. According to Petwoud Company’s analysis, they will record any excess of consideration paid over fair value of assets and liabilities acquired as a Patent asset to be amortized over 6 years.

Required

1. Using the acquisition method and assuming that Petwoud dissolves Supagud, Inc. so it is no longer in business, prepare Petwoud Company’s journal entry to record the acquisition of Supagud, Inc. at 1/1/20x1.

For B. and C. below, assume Supagud remains in business as a separate operating company and that, for internal accounting purposes, Petwoud accounts for their investment in Supagud, Inc. using the equity method:

2. Prepare Petwoud Company’s journal entry to record the acquisition of Supagud, Inc. at 1/1/20x1.
3. Prepare Petwoud Company’s worksheet consolidation journal entries for:
   1. December 31, 20x1 and
   2. December 31, 20x2.

Answer 1

Required A - Acquisition Method
Journal entries
Date	Accounts	Debit	Credit
1/1/20x1	Business Purchase	$      600,000
	Supagud Inc.		$      600,000
	(to record purchase of business )
1/1/20x1	Accounts Receivable	$         50,000
	Building	$      188,000
	Cash and shortterm investments	$         70,000
	Equipment	$      216,000
	Intangible asset	$      110,000
	Land	$      102,000
	Supplies	$         20,000
	Goodwill	$         84,000
	Accounts Payable		$         60,000
	Long term liabilities		$      180,000
	Business Purchase		$      600,000
	(to record assets and liabilities)
1/1/20x1	Supagud Inc.	$      600,000
	Cash		$      600,000
	(to record payment of cash)

Required B

Journal entries
Date	Accounts	Debit	Credit
1/1/20x1	Investment in Subsidiary	$      600,000
	Cash		$      600,000
	(to record purchase shares)

Required C (i) - Consolidation worksheet
Calculation of value of investment as at Dec 31, 20x1
Initial value	$      600,000
Add Net income	$      104,000
Less Dividend	$       (13,000)
Less Depreciation on excess FV - Building	$         (2,400)
Add Depreciation on excess BV - Equipment	$           3,000
Less Amortization of Patent	$       (14,000)
Closing Value	$      677,600

Journal entries
Date	Accounts	Debit	Credit
12/31/20x1	Common Stock	$      300,000
	Additional Paid in Capital	$         60,000
	Retained Earning	$      211,000
	Excess of FV over BV	$         36,600
	Patent	$         70,000
	Investment		$      677,600
	(to record eliminating Journal entry)

Required C (ii) - Consolidation worksheet
Calculation of value of investment as at Dec 31, 20x2
Initial value	$      677,600
Add Net income	$      142,000
Less Dividend	$       (30,000)
Less Depreciation on excess FV - Building	$         (2,400)
Add Depreciation on excess BV - Equipment	$           3,000
Less Amortization of Patent	$       (14,000)
Closing Value	$      776,200

Journal entries
Date	Accounts	Debit	Credit
12/31/20x2	Common Stock	$      300,000
	Additional Paid in Capital	$         60,000
	Retained Earning	$      323,000
	Excess of FV over BV	$         37,200
	Patent	$         56,000
	Investment		$      776,200
	(to record eliminating Journal entry)

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