Question

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Power Corporation acquired 100 percent ownership of Scrub Company on February 12, 20X9. At the date...

Power Corporation acquired 100 percent ownership of Scrub Company on February 12, 20X9. At the date of acquisition, Scrub Company reported assets and liabilities with book values of $430,000 and $184,000, respectively, common stock outstanding of $86,000, and retained earnings of $160,000. The book values and fair values of Scrub’s assets and liabilities were identical except for land, which had increased in value by $16,000, and inventories, which had decreased by $7,000.

Required:
a. Prepare the following consolidation entries required to prepare a consolidated balance sheet immediately after the business combination assuming Power acquired its ownership of Scrub for $271,000. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

A.) Record the basic consolidation entry.

B.) Record the excess value (differential) reclassification entry.

b. Prepare the following consolidation entries required to prepare a consolidated balance sheet immediately after the business combination assuming Power acquired its ownership of Scrub for $242,000. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

A.) Record the basic consolidation entry.

B.)Record the excess value (differential) reclassification entry.

Solutions

Expert Solution

The answers and explanations are given as follows:

a. Prepare the following consolidation entries required when cosideration is $271,000

A.) Record the basic consolidation entry.

Accounts Dr ($) Cr ($)

Common stock 86,000

Retained Earnings (w.1) 169,000

Goodwill (w.2) 16,000

Investment in Scrub company 271,000

(To record the elimination of investment and stockholder equity.)

B.) Record the excess value (differential) reclassification entry.

Note that $16,000 is transferred to Goodwill account in part 1 above.

The $16,000 is transferred to Goodwill because when the consideration is greater than the net asset value which is calculated as of common stock and retained earnings, the difference is the Goodwill.

When net consideration is more than the net asset value (stockholder equity), then the difference is to be transferred to Goodwill.

Workings:

w.1: Calculation of retained earnings to be eliminated

Particulars $

Retained Earnings Balance 160,000

Increase in land value 16,000

Decrease in inventory values (7,000)

Fair value retained earnings to be eliminated 169,000

w.2: Calculation of Goodwill to be recognized

Particulars $ $

Consideration paid for acquisition 271,000

Assets of Scrub:

Asset book value 430,000

Increase in land value 16,000

Decrease in inventory values (7,000)

Assets 439,000

Liabilities (184,000)

Net asset value of Scrub (255,000)

Goodwill to be recognized 16,000

b. Prepare the following consolidation entries required when consideration is $242,000

A.) Record the basic consolidation entry.

Accounts Dr($) Cr($)

Common stock 86,000

Retained Earnings (w.3) 169,000

Investment in Scrub company 242,000

Capital reserve (w.4) 13,000

(To record the elimination of investment and stockholder equity.)

B.) Record the excess value (differential) reclassification entry.

Note that $13,000 is transferred to Capital reserve in part 1 above.

The $13,000 is transferred to Capital reserve because when the consideration is greater than the net asset value which is calculated as of common stock and retained earnings, the difference is the Capital reserve.

When net consideration is more than the net asset value (stockholder equity), then the difference is to be transferred to Capital reserve.

Workings:

w.3: Calculation of retained earnings to be eliminated

Particulars $

Retained Earnings Balance 160,000

Increase in land value 16,000

Decrease in inventory values (7,000)

Fair value retained earnings to be eliminated 169,000

w.4: Calculation of Goodwill to be recognized

Particulars $ $

Consideration paid for acquisition 242,000

Assets of Scrub:

Asset book value 430,000

Increase in land value 16,000

Decrease in inventory values (7,000)

Assets 439,000

Liabilities (184,000)

Net asset value of Scrub (255,000)

Capital reserve to be recognized (13,000)

ekkarill92 answered 1 year ago

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