Question

Chapman Company obtains 100 percent of Abernethy Company’s stock on January 1, 2020. As of that date, Abernethy has the following trial balance:

	Debit			Credit
Accounts payable				$	51,900
Accounts receivable	$	43,100
Additional paid-in capital					50,000
Buildings (net) (4-year remaining life)		175,000
Cash and short-term investments		75,500
Common stock					250,000
Equipment (net) (5-year remaining life)		439,500
Inventory		127,000
Land		116,500
Long-term liabilities (mature 12/31/23)					170,500
Retained earnings, 1/1/20					464,900
Supplies		10,700
Totals	$	987,300		$	987,300

During 2020, Abernethy reported net income of $87,000 while declaring and paying dividends of $11,000. During 2021, Abernethy reported net income of $122,500 while declaring and paying dividends of $55,000.

Assume that Chapman Company acquired Abernethy’s common stock for $873,250 in cash. As of January 1, 2020, Abernethy’s land had a fair value of $129,800, its buildings were valued at $243,800, and its equipment was appraised at $403,750. Chapman uses the equity method for this investment.

Prepare consolidation worksheet entries for December 31, 2020, and December 31, 2021.

Answer 1

All amounts are in $

Total Book value = 50,000 + 464,900 + 250,000 = 764,900

Total Fair value = 873,250

Difference = 108,350

Allocating the difference :

Land = 129,800 - 116,500 = 13,300

Building = 243,800 - 175,000 = 68,800

Equipment = 403,750 - 439,500 = -35,750

Total difference = 46,350

Difference allocated to Goodwill = 108,350 - 46,350 = 62,000

Depreciation on Building = 17,200

Depreciation on Equipment = -7,150

Net Depreciation increase per year = 10,050

Consolidation worksheet entries for year 2020

1. Equity in subsidiary earnings $87,000

Dividends Declared $11,000

Investment in Abernathy $76,000

2.

Common Stock - Abernathy $250,000

Additional Paid in Capital $50,000

Retained Earnings $464,900

Difference between IV & BV $108,350

Investment in Abernathy $873,250

3.

Land $13,300

Building $68,800

Goodwill $62,000

Equipment $35,750

Difference between IV & BV $108,350

4.

Depreciation Expense $10,050

Equipment $7,150

Building $17,200

Consolidation Worksheet entries for 2021

1. Equity in Subsidiary Earnings $122,500

Dividends Declared $55,000

Investment in Abernathy $67,500

2.

Common Stock Abernathy $250,000

Additional Paid in Capital $50,000

Retained Earnings $540,900

Difference between IV & BV $98,300 (108,350-10,050)

Investment in Abernathy $939,200 (949,250-10,050)

3.

Land $13,300

Building $51,600 (68,800-17,200)

Goodwill $62,000

Equipment $28,600 (35,750-7,150)

Difference between IV & BV $98,300

4.

Depreciation Expense $10,050

Equipment $7,150

Building $17,200

Note :

Assumed as full equity method and not partial equity method

IV = Implied Value

BV = Book Value