Question

Prussman Company acquires a 30% interest in Sully Corporation and concludes that it has significant influence over Sully. The book value of Sully’s stockholders’ equity is $600,000 and Prussman pays $300,000 for the investment. An excess of purchase price over book value was attributable to an unrecorded customer list worth $400,000, with a useful life of 10 years. After the acquisition, Sully reported net income of $150,000 and declared and paid a dividend of $40,000. At the end of the year, Prussman sells the investment for $350,000. Instructions:

a. Prepare the allocation of the acquisition in good form (6 points):

b. Journalize the entry to record the equity acquisition of Sully (3 points):

c. Journalize the entry to record the declaration of the Sully dividend (2 point):

d. Journalize the entry to record the receipt of the Sully dividend (2 point): 3

e. Journalize the proportionate share of Sully’s net income for the year (3 points):

f. Journalize the amortization of the excess amortization (3 points):

g. Journalize the sale of Sully at the end of the year (6 points):

Answer 1

Requirement a:  Prepare the allocation of the acquisition as follows

Acquisition price allocation	Amount
Fair value of consideration paid	$300,000
Deduct: Book value of equity ($600,000 × 30%)	$180,000
Payment in excess of book value	$120,000

Excess payment identified with specific assets		Useful Life	Amortization
Deduct: Customer list ($400,000 × 30%)	$120,000	$10	$12,000
Goodwill	$0

Requirement b: Prepare the following journal entry for the acquisition of equity

Date	Account Title and Explanation	Debit	Credit
	Investment in Sully	$300,000
	Cash		$300,000
	To record investment in Sully

Requirement c: Prepare the following journal entry  to record the declaration of dividend

Date	Account Title and Explanation	Debit	Credit
	Divided receivable ($40,000 × 30%)	$12,000
	Investment in Sully		$12,000
	To record dividend declared by Sully

Requirement d: Prepare the following journal entry to record the receipt of dividend  

Date	Account Title and Explanation	Debit	Credit
	Cash	$12,000
	Divided receivable		$12,000
	To record dividend received

  Requirement e: Prepare the following journal entry to record proportionate share of Sully’s net income  

Date	Account Title and Explanation	Debit	Credit
	Investment in Sully ($150,000 × 30%)	$45,000
	Equity income - Investment in Sully		$45,000
	To record the share in the income of Sully

Requirement f: Prepare the following journal entry to record the amortization of the excess amortization

Date	Account Title and Explanation	Debit	Credit
	Equity income - Investment in Sully	$12,000
	Investment in Sully		$12,000
	To record the amortization of customer list

Requirement g: Prepare the following journal entry to record sale of investment

Date	Account Title and Explanation	Debit	Credit
	Cash	$350,000
	Gain on sale of investment		$29,000
	Investment in Sully		$321,000
	To record sale of investment at gain

Notes: Book value of investment

Initial investment in sully	$300,000
Add: Share of income in Sully	$45,000
Deduct: Dividends received	($12,000)
Deduct: Amortization of excess amortization	($12,000)
Book value of investment	$321,000