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Errant Inc. purchased 100% of the outstanding voting shares of Grub Inc. for $200,000 on January...

Errant Inc. purchased 100% of the outstanding voting shares of Grub Inc. for $200,000 on January 1, 2019. On that date, Grub Inc. had common shares and retained earnings worth $100,000 and $60,000, respectively. Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Grub's fair market values on the date of acquisition are disclosed below:

Errant Inc. Grub Inc. Grub Inc.
(carrying value) (carrying value) (fair value)
Cash $120,000 $76,000 $76,000
Accounts Receivable $80,000 $40,000 $40,000
Inventory $60,000 $34,000 $50,000
Equipment (net) $400,000 $80,000 $70,000
Trademark $70,000 $84,000
Total Assets $660,000 $300,000
Current Liabilities $180,000 $80,000 $80,000
Bonds Payable $320,000 $60,000 $64,000
Common Shares $90,000 $100,000
Retained Earnings $70,000 $60,000
Total Liabilities and Equity $660,000 $300,000



The net incomes for Errant and Grub for the year ended December 31, 2019 were $160,000 and $90,000 respectively. Grub paid $9,000 in dividends to Errant during the year. There were no other inter-company transactions during the year. Moreover, an impairment test conducted on December 31, 2019 revealed that the Goodwill should actually have a value of $20,000. Both companies use a FIFO system, and most of Grub's inventory on the date of acquisition was sold during the year. Errant did not declare any dividends during the year.

Assume that any difference between the fair values and book values of the equipment, trademark and bonds payable would all be amortized over 10 years.

Assume that Errant Inc. uses the equity method unless stated otherwise.

What would be Errant's journal entry to record the amortization of the acquisition differential (excluding any goodwill impairment) on December 31, 2019?

Multiple Choice

  • Debit Credit
    Investment in Grub $16,000
    Equity method income

    $16,000
  • Debit Credit
    Equity method income $18,800
    Investment in Grub $18,800
  • Debit Credit
    Equity method income $16,000
    Investment in Grub $16,000
  • Debit Credit
    Investment in Grub $18,800
    Equity method income $18,800

Solutions

Expert Solution

Answer:-

Debit Credit

Investment in Grub $16,000

Equity method income                       $16,000

Explanation:-

Schedule of amortization and impairment of acquisition differential:

Unamortized Jan. 1, 2019       2019 amortization Unamortized Dec. 31, 2019

Inventory        $16,000           $16,000           $0

Equipment (net) (10 years)    

$(10,000)         ($1,000)           $(9,000)

Trademarks (10 years)

$14,000           $1,400 $12,600

Bonds Payable (10 years)      

$(4,000)           ($400) $(3,600)

Goodwill         $24,000           ignored            $24,000 TOTAL    $40,000           $16,000           $24,000

ekkarill92 answered 1 year ago
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