Question

Student is to write a paper describing the consolidation process when a wholly-owned subsidiary acquired at more than book value. The paper must clearly present calculations of how amounts were determined and the journal entries required to record the acquisition by the purchaser.

Answer 1

100 percent ownership acquired at more than book value

Peerless acquires all of Special Foods’ outstanding stock on January 1, 20X1, by paying $340,000 cash, an amount equal to Special Foods’ fair value as a whole. The consideration given by Peerless is $40,000 in excess of Special Foods’ book value of $300,000.

Like on 01/01/2011 100% acquired

Fair Value of consideration $340000

Less: Book value of shares acquired

common stock $200000

Retained earnings $100000

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Differential $40000

    Peerless records the stock acquisition:

January 1 2011

Investment in special foods $ 340000

To Cash $340000

(Record purchase of special foods stock)

•The workpaper entry to eliminate Peerless’s investment account and the stockholders’ equity accounts of Special Foods is:

Common stock - special foods Dr $200000

Retained earning Dr $100000

Differential Dr $40000  

To Investment in speciality food stock $340000

(Eliminate Investment Balance)

•The fair value, and hence acquisition price, of a subsidiary might exceed the book value for several reasons:

•Errors or omissions on the books of the subsidiary

•Excess of fair value over the book value of the subsidiary’s net identifiable assets

•Existence of goodwill

•Errors or omissions on the books of the subsidiary

–Corrections should be made directly on the subsidiary’s books as of the date of acquisition

•Excess of fair value over book value of subsidiary’s net identifiable assets

–The assets and liabilities of the subsidiary may be revalued directly on the books of the subsidiary

–The accounting basis of the subsidiary may be maintained and the revaluations made each period in the consolidation workpaper

If the fair value of Special Foods’ land is determined to be $40,000 more than its book value, and all other assets and liabilities have fair values equal to their book values, the entire amount of the differential is allocated to the subsidiary’s land

Land Dr $40000

To differential $40000

(Assign differential to land)

•Existence of goodwill

–Related to the future economic benefits associated with other assets of the subsidiary that are not separately identified and recognized

Assuming that the acquisition-date fair values of Special Foods’ assets and liabilities are equal to their book values, then the $40,000 difference between the $340,000 consideration exchanged and the $300,000 fair value of the subsidiary’s net identifiable assets is attributed to goodwill.

Goodwill Dr 40000

To differential 40000

(Assign differential to goodwill)