Question

Chapman Company obtains 100 percent of Abernethy Company’s stock on January 1, 2020. As of that date, Abernethy has the following trial balance:

	Debit			Credit
Accounts payable				$	50,000
Accounts receivable	$	40,000
Additional paid-in capital					50,000
Buildings (net) (4-year remaining life)		120,000
Cash and short-term investments		60,000
Common stock					250,000
Equipment (net) (5-year remaining life)		200,000
Inventory		90,000
Land		80,000
Long-term liabilities (mature 12/31/23)					150,000
Retained earnings, 1/1/20					100,000
Supplies		10,000
Totals	$	600,000		$	600,000

During 2020, Abernethy reported net income of $80,000 while declaring and paying dividends of $10,000. During 2021, Abernethy reported net income of $110,000 while declaring and paying dividends of $30,000.

Assume that Chapman Company acquired Abernethy’s common stock for $500,000 in cash. Assume that the equipment and long-term liabilities had fair values of $220,000 and $120,000, respectively, on the acquisition date. Chapman uses the initial value method to account for its investment.

Prepare consolidation worksheet entries for December 31, 2020, and December 31, 2021. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Step 1: Determine Annual Excess Amortizations:

The value of annual excess amortizations is arrived as below:

Excess of Consideration Paid over Book Value = 500,000 - (50,000 + 250,000 + 100,000) = $400,000

This excess value of $100,000 will get allocated and amortized as follows:

		Remaining Life/Maturity	Annual Excess Amortizations
Equipment (220,000 - 200,000)	20,000	5 Years	4,000 (20,000/5)
Long-Term Liabilities (150,000 - 120,000)	30,000	4 Years	7,500 (30,000/4)
Goodwill (100,000 - 20,000 - 30,000)	50000	Indefinite	0
Total	100,000		11,500

Step 2: Consolidation Worksheet Entries for 2020 and 2021:

The consolidation worksheet entries for the 2 years are prepared as below:

Particulars	Debit	Credit
Consolidation Entries as of December 31, 2020
Entry S
Common Stock-Abernethy	$250,000
Additional Paid-in Capital	$50,000
Retained Earnings-1/1/2020	$100,000
Investment in Abernethy		$400,000
(To eliminate stockholder's equity accounts of subsidiary)
Entry A
Equipment	$20,000
Long-Term Liabilities	$30,000
Goodwill	$50,000
Investment in Abernethy		$100,000
(To allocate excess of consideration paid over book value)
Entry I
Dividend Income	$10,000
Dividends Paid		$10,000
(To eliminate intercompany dividend payments recorded by parent company as income)
Entry E
Depreciation Expense	$4,000
Interest Expense	$7,500
Equipment		$4,000
Long-Term Liabilities		$7,500
(To record amortization expense for 2020)
Consolidation Entries as of December 31, 2021
Entry*C
Investment in Abernethy (80,000 - 10,000 - 11,500)	$58,500
Retained Earnings-1/1/2021 (Chapman)		$58,500
(To record conversion of parent company figures to equity method)
Entry S
Common Stock-Abernethy	$250,000
Additional Paid-in Capital	$50,000
Retained Earnings-1/1/2020	$170,000
Investment in Abernethy		$470,000
(To eliminate opening stockholder's equity accounts of subsidiary)
Entry A
Equipment (20,000 - 4,000)	$16,000
Long-Term Liabilities (30,000 - 7,500)	$22,500
Goodwill	$50,000
Investment in Abernethy		$1,00,000
(To recognize allocations relating to investment-balances)
Entry I
Dividend Income	$10,000
Dividends Paid		$10,000
(To eliminate intercompany dividend payments recorded by parent company as income)
Entry E
Depreciation Expense	$4,000
Interest Expense	$7,500
Equipment		$4,000
Long-Term Liabilities		$7,500
(To record amortization expense for 2021)