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		$	(594,000	)		$	(248,000	)
Cost of goods sold			264,000				94,000
Depreciation expense			108,000				52,000
Investment income			NA				NA
Retained earnings, 1/1/21			(920,000	)			(580,000	)
Dividends declared			134,000				36,000
Current assets			204,000				682,000
Land			312,000				84,000
Buildings (net)			502,000				156,000
Equipment (net)			206,000				242,000
Liabilities			(408,000	)			(314,000	)
Common stock			(304,000	)			(40,000	)
Additional paid-in capital			(42,000	)			(924,000	)

Assume that Mergaronite acquired Hill on January 1, 2017, by issuing 7,000 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 $18,800, its buildings were overvalued by $31,000, and equipment was undervalued by $61,400. The buildings had a 10-year remaining life; the equipment had a 5-year remaining life. A customer list with an appraised value of $94,000 was developed internally by Hill and was estimated to have a 20-year remaining useful life.

1. Determine the December 31, 2021, consolidated totals for the following accounts:

2. In requirement (a), can the consolidated totals be determined without knowing which method the parent used to account for the subsidiary?

3. If the parent uses the equity method, what consolidation entries would be used on a 2021 worksheet?

Answer 1

ans.C	If the parent uses the equity method, what consolidation entries would be used on a 2018 worksheet?
	In the Books of Mergaronite
	General Journal
Event	Account	DEBIT	CREDIT
Entry S	Common Stock A/c Dr (Hill )	40000
	Additional Paid in Capital A/c Dr (Hill )	924000
	Retained Earnings A/c Dr.	580000
	To Investment In Hill A/c		1544000
	(To eliminate begining stockholder's equity of the subsidiary)
Entry A	Land A/c Dr	18800
	Equipment net A/c Dr [$ 61,400 / 5] *(5-4)	12280
	Customer List net A/c Dr. ( $ 94000 / 20] * (20-4)	75200
	To Building net A/c (31000 / 10 )* (10-4)		18600
	To Investment in Hill A/c (B.F)		87680
	(To recognize unamortized allocation balances as on beginning of current year)
Entry I	Investment Income A/c Dr ($248000-$94000-$52000- $13880)	88120
	(Investment Income = Revenue - COGS - Depreciation - Amortization Expense for the year)
	To Investment in Hill		88120
	(To remove equity income recognized during year-equity method accrual [based on subsidiary's income] less amortization for the year] )
Entry D	Investment in Hill A/c Dr.	36000
	To Dividend Paid		36000
	(To remove intercompany dividend payments )
Entry E	Amortization Expense A/c Dr.	4700
	Deprecition Expense A/c Dr.($ 12280 -$ 3100)	9180
	Building A/c Dr	3100
	To Customer List A/c		4700
	To Equipment A/c		12280
	(To recognize excess acquisition-date fair-value amortizations for the period)
	Note : Fair value allocation and amortization
	Builiding = $ 31000 / 10 years = ( $ 3100 )
	Equipment = $ 61,400 / 5 years = $ 12,280
	Customer List = $ 94,000 / 20 years = $ 4700
	Total Amortization = $ 13880