In: Accounting
On January 1, 2019 Roberts Corporation acquired 100% of the outstanding voting stock of Williams Company in exchange for $726,000 cash. At that time, although Williams book value was $560,000, Roberts assessed Williams total business fair value at $726,000.
The book values of Williams individual assets and liabilities approximated their acquisition-date fair values except for the equipment account which was undervalued by $100,000. The undervalued equipment had a 5-year remaining life at the acquisition date. Any remaining excess fair value was attributed to goodwill.
Separate financial statements for both companies on December 31, 2019 are shown below:
Roberts | Williams | |
Revenues | (800,000) | (500,000) |
Cost of Goods Sold | 500,000 | 300,000 |
Depreciation Expense | 100,000 | 60,000 |
Equity in Income of Williams | (120,000) | 0 |
Net Income: | (320,000) | (140,000) |
Retained Earnings 1/1/19 | (1,085,000) | (320,000) |
Net Income (above) |
(320,000) | (140,000) |
Dividends paid | 115,000 | 60,000 |
Retained Earnings 12/31/19: | (1,290,000) | (400,000) |
Cash | 234,000 | 125,000 |
Accounts Receivable | 365,000 | 172,000 |
Inventory | 375,000 | 225,000 |
Investment in Williams Stock | 786,000 | 0 |
Land | 180,000 | 200,000 |
Buildings and Equipment (net) | 580,000 | 283,000 |
Total Assets: | 2,520,000 | 1,005,000 |
Accounts Payable | (110,000) | (65,000) |
Notes Payable | (310,000) | (300,000) |
Common Stock | (610,000) | (150,000) |
Additional Paid-in Capital | (200,000) | (90,000) |
Retained Earnings, 12/31/19 | (1,290,000) | (400,000) |
Total Liabilities and Stockholder's Equity | 2,520,000 | 1,005,000 |
Required:
1. Assuming that Roberts accounts for its investment in Williams using the equity method, prepare the general journal entries (i.e. "real entries") for the year ending December 31, 2019. When posted to t-accounts, these entries should allow you to "prove" both the investment in Williams and the Equity in Income of Williams (i.e. investment income) balances of $786,000 and $120,000, respectively, as shown on the statements above.
2. Next, prepare all of the necessary eliminating entries (i.e. "worksheet entries") needed at December 31, 2019 and prepare the necessary worksheet to consolidate the two companies as of December 31, 2019. Your worksheet should include the amounts which would be reported on the income statement and statement of retained earnings as well as the balance sheet.
3. Finally, assume that Williams earns net income of $180,000 and paid dividends of $50,000 during the following year (i.e. 2020). Repeat requirements 1 and 2 above for the year ending December 31, 2020. You are not required to prepare the worksheet for 2020.