Question

On January 1, 2020, Palka, Inc., acquired 70% of the outstanding shares of Sellinger Company for $1,290,800 in cash. The price paid was proportionate to Sellinger’s total fair value, although at the acquisition date, Sellinger had a total book value of $1,570,000. All assets acquired and liabilities assumed had fair values equal to book values except for a patent (six-year remaining life) that was undervalued on Sellinger’s accounting records by $264,000. On January 1, 2021. Palka acquired an additional 25% common stock equity interest in Sellinger Company for $475,000 in cash. On its internal records, Palka uses the equity method to account for its shares of Sellinger.

     During the two years following the acquisition, Sellinger reported the following net income and dividends:

	2020	2021
Net Income	$ 480,000	$ 593,000
Dividends Declared	200,000	240,000

1. Show Palka’s journal entry to record its January 1, 2021, acquisition of an additional 25% ownership of Sellinger Company shares

2. Prepare a schedule showing Palka’s December 31, 2021, equity method balance for its Investment in Sellinger account.

Answer 1

Answer:

A. Journal entry for additional acquisition of 25% ownership of Sellinger Company on January 01, 2021
Acquisition date fair value	$1,290,800	70%	$1,844,000
Sellinger net income for 2020			$480,000
excess fair value amortization 2020			(44,000)
Sellinger dividend 2020			(200,000)
Acquisition date adjusted subsidiary value on 31/12/2020			$2,080,000
Percent acquired on 1/1/2021			25%
Acquisition date based value for newly acquired shares			$520,000
Acquisition price paid for 25% shares			$475,000
Palka's APIC			$45,000
Investment in Sellinger	$520,000
Cash		$475,000
APIC		$45,000
B. Schedule showing Palka's December 31, 2021, equity method balance for its Investment in
Sellinger account
Initial Value of acquisition -70%	$1,290,800
Adjusted subsidiary net income 2020 - 70%	$305,200
Subsidiary dividend 2020-70%*200,000	($140,000)
Adjusted fair value of newly acquired shares	$520,000
Adjusted subsidiary 2021 net income -95%	$521,550
Subsidiary dividend 2021 - 95%* 240,000	($228,000)
Investment in Sellinger 12/31/2021	$2,269,550
Working Note:
Fair value amortization for Patent
= $264000/6 years
= $ 44000 per year
Adjusted subsidiary net income 2020
Net income	480,000
Less: Amortization for Patent	(44,000)
Adjusted net income	436,000
Share of Palka-70%	305,200
Adjusted subsidiary net income 2021
Net income	593,000
Less: Amortization for Patent	(44,000)
Adjusted net income	549,000
Share of Palka-95%	521,550