Question

Branson paid $573,200 cash for all of the outstanding common stock of Wolfpack, Inc., on January 1, 2020. On that date, the subsidiary had a book value of $430,000 (common stock of $200,000 and retained earnings of $230,000), although various unrecorded royalty agreements (10-year remaining life) were assessed at a $133,000 fair value. Any remaining excess fair value was considered goodwill.

In negotiating the acquisition price, Branson also promised to pay Wolfpack’s former owners an additional $44,000 if Wolfpack’s income exceeded $150,000 total over the first two years after the acquisition. At the acquisition date, Branson estimated the probability-adjusted present value of this contingent consideration at $30,800. On December 31, 2020, based on Wolfpack’s earnings to date, Branson increased the value of the contingency to $35,200.

During the subsequent two years, Wolfpack reported the following amounts for income and dividends:

	Net Income			Dividends Declared
2020	$	79,500		$	15,000
2021		89,500			25,000

In keeping with the original acquisition agreement, on December 31, 2021, Branson paid the additional $44,000 performance fee to Wolfpack’s previous owners.

Prepare each of the following:

1. Branson’s entry to record the acquisition of the shares of its Wolfpack subsidiary.

2. Branson’s entries at the end of 2020 and 2021 to adjust its contingent performance obligation for changes in fair value and the December 31, 2021, payment.

3. Prepare consolidation worksheet entries as of December 31, 2021, assuming that Branson has applied the equity method.

4. Prepare consolidation worksheet entries as of December 31, 2021, assuming that Branson has applied the initial value method.

Answer 1

Solution:

No	Particulars	Debit	Credit
A	Investment on Wolfpack	$604,000
	Contigent performance obligation		$30,800
	Cash		$573,200
B	Loss from increase in contingent performance obligation ($35,200 -$30,800)	$4,400
	contingent performance obligation		$4,400
	Loss from increase in contingent performance obligation( $44,000 -$35,200)	$8,800
	contingent performance obligation		$8,800
	contingent performance obligation	$44,000
	Cash		$44,000
C	Common stock wolfpack	$200,000
	Retained earnings wolfpack($230,000+$79,500-$15,000)	$294,500
	Investment in wolfpack		$494,500
	Royalty agreements($133,000-$13,300)	$119,700
	Goodwill ($604,000-$403,000-$133,000)	$41,000
	Investment in wolfpack		$160,700
	Equity earnings in wolfpack ($89,500 -$13,300)	$76,200
	Investment in wolfpack		$76,200
	Investment in wolfpack	$25,000
	Dividends decalred		$25,000
	Amortization expense($133,000/10)	$13,300
	Royalty agreements		$13,300
D	Investment in Wolfpack ($79,500-$15,000+$13,300)	$51,200
	Retained earnings Barson		$51,200
	Common stock	$200,000
	Retained earnings wolfpack	$294,500
	Investment in wolfpack		$494,500
	Royalty agreements	$119,700
	Goodwill	$41,000
	Investment in wolfpack		$160,700
	Dividends income	$25,000
	Dividends declared		$25,000
	Amortization expense	$13,300
	Royalty agreements		$13,300

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