Question

1. On January 1, 2020, Pantop Corporation acquired 85% of the outstanding common stock of Sunny Company for $527,000. There was no control premium.

The following information about Sunny Company on January 1, 2020 was available:

	Book value	Fair value
Cash	193,000	193,000
Inventory	40,000	39,400
Building	180,000	200,000
Total	413,000	432,400
Accounts Payable	3,000	3,000
Common Stock	200,000
Add. Paid-in Capital	110,000
Retained Earnings	100,000
Total	413,000

Pantop uses the complete equity method to account for its investment in Sunny. During 2020, Sunny had a net income of $80,000. The remaining useful life of the building was five years with no salvage value. Sunny uses straight line depreciation. Sunny’s cost of goods sold (FIFO) was $70,000 in 2020. On December 23, 2020, Sunny declared and paid $48,000 cash dividend to its shareholders. Goodwill was unimpaired as of December 31, 2020.

      

(i)  Prepare journal entries for Pantop to record under the complete equity method of accounting the operating results of Sunny in 2020.

(ii) Prepare the working paper eliminating entries C, E, R, O and N (in journal entry format) for Pantop Corporation and subsidiary for the year ended December 31, 2020.

Answer 1

Net asset value
Common stock	200000
APIC	110000
Retained earnings	100000
Net asset book value	410000
Fair value in excess of book value
Inventory	-600
Building	20000
	19400
Net asset at fair value	429400
NCI	93000
Purchase price	527000
Goodwill	190600

Differential depreciation	=excess fair value over book value/remaining useful life
	=20000/5
	4000
Changes in income of Sunny
Differential depreciation	-4000
Cost of Goods sold	600
	-3400

Journal entry
Acquisition entry
	Dr	Cr
Investment in Sunny	527000
To cash		527000
Investment in Sunny	68000
To income from sunny		68000
Cash	40800
To investment in Sunny		40800
Income from sunny	2890
To investment in sunny		2890
Eliminating entries
Income from Sunny	68000
NCI share in income	12000
To dividends		48000
To investment in sunny		27200
To NCI in NA		4800
Common stock	200000
APIC	110000
Retained earnings	100000
To investment in Sunny		348500
To NCI in NA		61500
Building	20000
Goodwill	190600
To inventory		600
To investment in sunny		178500
To NCI in NA		31500
Depreciation expense	4000
To accumulated depreciation		4000
Inventory	600
To cost of goods sold		600
Income from sunny	3400
cost of goods sold	600
To depreciation expense		4000
Investment in sunny	2890
NCI in NA	510
To income from sunny		3400