Question

The following are selected accounts and balances for Mergaronite Company and Hill, Inc., as of December 31, 2021. Several of Mergaronite’s accounts have been omitted. Credit balances are indicated by parentheses. Dividends were declared and paid in the same period. Mergaronite Hill Revenues $ (584,000 ) $ (258,000 ) Cost of goods sold 276,000 92,000 Depreciation expense 110,000 54,000 Investment income NA NA Retained earnings, 1/1/21 (902,000 ) (582,000 ) Dividends declared 138,000 38,000 Current assets 196,000 660,000 Land 286,000 92,000 Buildings (net) 502,000 160,000 Equipment (net) 206,000 254,000 Liabilities (410,000 ) (318,000 ) Common stock (298,000 ) (40,000 ) Additional paid-in capital (54,000 ) (892,000 ) Assume that Mergaronite acquired Hill on January 1, 2017, by issuing 8,000 shares of common stock having a par value of $10 per share but a fair value of $100 each. On January 1, 2017, Hill’s land was undervalued by $20,600, its buildings were overvalued by $31,200, and equipment was undervalued by $61,800. The buildings had a 10-year remaining life; the equipment had a 5-year remaining life. A customer list with an appraised value of $108,000 was developed internally by Hill and was estimated to have a 20-year remaining useful life. Determine the December 31, 2021, consolidated totals for the following accounts: In requirement (a), can the consolidated totals be determined without knowing which method the parent used to account for the subsidiary? If the parent uses the equity method, what consolidation entries would be used on a 2021 worksheet?

Answer 1

(A). Workings to determine the consolidated totals as on December 31 2021

Revenues

Particulars	Amount
Revenues of Mergaronite	$ 584,000
Revenues of Hill	$2,58,000
Total	$8,42,000

Amortization Expense

Particulars	Amount
Amortization Expense for 2021 ($ 108000/20 = $ 5,400)	$5,400
Total	$5,400

Building

Particulars	Amount
Building of Mergaronite	$5,02,000
Building of Hill	$1,60,000
Over Valuation of Building	$31200
Total	$6,93,200

Depreciation Expense

Particulars	Amount
Depreciation Expense of Mergaronite	$1,10 00
Depreciation Expense of Hill	$54,000
Depreciation on the over Valuation of Building (31200/10)	$3,120
Depreciation on undervalued Equuipment (61800/5)	$12,360
Total	$1,79480

Additional paid in capital

Particular	Amount
Additional paid in capital of Mergaronite	$54,000
Total	$54,000

Note: Here we consider the additional paid in capital of parent company only. Because the Mergaronite tool over hill by issuing additional paid in capital in Mergaronite company.

customer list

Particulars	Amount
customer list value as on 2017	$1,08,000
Less : Amortization 2021	$5,400
Less : Amortization for 4 years	$21600
Total	$81000

Customer list development by Hill Inc, is consider as patent each year Amortization expense is ($108,000 /20) Amortization expense for ( 2017 , 2018,2019,2020) Value of customer list as on 31st December 2021.

Cost of Goods sold

Particulars	Amount
Cost of Goods sold of Mergaronite	$2,76,000
Cost of Goods sold of Hill	$92,000
Total	$3,68,000

Common Stock

Particulars	Amount
Common Stock of Mergaronite	$298,000
Total	$298,000

Note: Here we consider the common stock of parent company only. Because the Mergaronite took over hill by issuing common stock in Mergaronite company.

Equipment

Particulars	Amount
Equipment of Mergaronite	$2,06,000
Equipment of Hill	$2,54,000
Total	$4,60,000

Equipment that was undervalued by $61,800 need not do any adjustment. Equipment was undervalued on January 2017 and by the end of 2021 the 5 years period is completed

(B). Here we are not dealing with the parent's company investment account and there are no relprocity entries required to be posted. No adjustment are to be made on earnings on equity and dividends. Hence the method used by the parent company does not matters.

C). Consolidation entries if parent company is using equity method

Elimination entry passed to Eliminate investment A/C in Subsidiary

Particulars	Amount	Amount
Retained Earnings A/C dr	$582,000
Common Stock dr	$40,000
Additional Paid in capital dr	$892,000
To Investment cr		$1514,000
( to eliminate begining stockholders equity of subsidary)
Land dr	$20600
Equipment dr	$12,360
Customer list dr	$102600
To Building net A/C dr		$28080
To Investment in HIll A/C		$107480
( to record un amortized allocation balance as of begining of current year)
Investment in Hill dr	$38000
To Dividend Paid		$38000
( to remove intra entity dividend declaration)
Depreciation A/c dr	$9240
Amortization A/c dr	$5,400
Building dr	$3,120
To Equipment A/c dr		$12360
To Customer A/c dr		$5,400
( to recognize excess acqition date fair value amortization )