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32. Patriot Corporation acquired 75% ownership of Seahawk Corporation on January 1, 20X8, for $300,000. The...

32. Patriot Corporation acquired 75% ownership of Seahawk Corporation on January 1, 20X8, for $300,000. The fair value of the noncontrolling interest was $100,000. At that date, Seahawk reported common stock outstanding of $100,000 and retained earnings of $180,000. The differential is assigned to equipment, which had a fair value $50,000 greater than book value and a remaining economic life of 5 years at the date of the business combination. The remaining excess is considered goodwill. Seahawk reported net income of $40,000 and paid dividends of $20,000 in 20X8.

Required:

  1. What is the amount of goodwill?
  2. Provide the journal entries recorded by Patriot during 20X8 on its books if it accounts for its investment in Seahawk using the equity method.
  3. Give the consolidating entries needed at December 31, 20X8, to prepare consolidated financial statements.

Basic consolidation entry: Amortized excess value reclassification entry:

Excess value (differential) reclassification entry:

Solutions

Expert Solution

ANSWER :-

1.

Calculation of Goodwill
Consideration Paid for 75% $300,000
Add: NCI Fair value $100,000
Total Fair Value $400,000
Less: Book Value $-280,000
Excess Fair Value $120,000
Allocated to: Life Amortization NCI Patriot
Equipment $50,000 5Year $10,000 $2,500 $7,500
Goodwill $120,000-$50,000 $70,000

2.

Account Debit Credit
Investment in Seahawk $300,000
     Cash $300,000
(to record initial investment)
Investment in Seahawk $30,000
     Income from Seahawk $30,000
(To record 75% income share) $40,000*75%
Cash $15,000
     Investment in Seahawk $15,000
(To record dividend share) 75%*$20,000
Income from Seahawk $7,500
     Investment in Seahawk $7,500
(To record 75% amortization) $10,000*75%

3.

Common Stock $100,000
Retained Earning $180,000
Income from Seahawk $30,000
NCI in Net income of Seahawk $10,000
     Dividends Declared $ 20,000
     Investment in Seahawk (Working-1) $225,000
     NCI in Net Asset of Sehawk (Working-1) $ 75,000
(To record elimination entry)
Working for above entry:
NCI Patriot
Beginning Book Value $280,000*75% and 25% $70,000 $210,000
Add: Income Share $10,000 $ 30,000
Less: Dividend share $-5,000 $ -15,000
$75,000 $225,000
Depreciation Expense $10,000
     Investment in Seahawk (From Part -1) $7,500
     NCI in Net Income of Sehawk (From Part-1) $2,500
(To record amortization)
Equipment $50,000
     Accumulated Depreciation $10,000
     Investment in Seahawk (50000-10000)*75% $30,000
     NCI in Net Asset of Sehawk (50000-10000)*25% $10,000
(To record excess value)

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