Question

Cost method consolidation entries (controlling investment in affiliate, fair value differs from book value) Assume an investee has the following financial statement information for the three years ending December 31, 2016: MB (At December 31) 2016 2015 2014 Current assets $228,376 $222,160 $165,600 Tangible fixed assets 529,384 459,440 450,400 Intangible assets 32,000 36,000 40,000 Total assets $789,760 $717,600 $656,000 Current liabilities $96,800 $88,000 $80,000 Noncurrent liabilities 212,960 193,600 176,000 Common stock 80,000 80,000 80,000 Additional paid-in capital 80,000 80,000 80,000 Retained earnings 320,000 276,000 240,000 Stockholders' equity 480,000 436,000 400,000 Total liabilities and equity $789,760 $717,600 $656,000 (For the years ended December 31) 2016 2015 2014 Revenues $776,000 $736,000 $680,000 Expenses 700,800 672,000 620,000 Net income $75,200 $64,000 $60,000 Dividends $31,200 $28,000 $20,000 Assume that on January 1, 2014, an investor company purchased 100% of the outstanding voting common stock of the investee. On the date of the acquisition, the investee’s identifiable net assets had fair values that approximated their historical book values, except for tangible fixed assets, which had fair value that was $90,000 higher than the investee’s recorded book value. The tangible fixed assets had a remaining useful life of 6 years. In addition, the acquisition resulted in goodwill in the amount of $175,000 recognized in the consolidated financial statements of the investor company. On January 1, 2014, the investee’s retained earnings balance was $200,000. Assuming that the investor company uses the cost method to account for its investment in the investee, what is the amount of the [ADJ] entry necessary to prepare the consolidated financial statements for the year ended December 31, 2016? $46,000 $75,000 $76,000 $120,000

Answer 1

Acquisition cost on Jun 1 2017

Book value of net assets + $90000 + goodwill

(165600+450400+90000-80000-176000+175000)       =   625000

Less: Depreciation for 3 years on $90000

                       (90000/6)*3                                         =    -45000

Add: net Income for 3 years (75200+64000+60000) =    199200

Less: dividend (31200+28000+20000)                        =   -79200

Investment Invested on Dec 31 2016                          =    700000

Therefore,Option C $700000