Question

Chapman Company obtains 100 percent of Abernethy Company’s stock on January 1, 2017. As of that date, Abernethy has the following trial balance:

	Debit			Credit
Accounts payable				$	58,000
Accounts receivable	$	40,200
Additional paid-in capital					50,000
Buildings (net) (4-year remaining life)		170,000
Cash and short-term investments		66,750
Common stock					250,000
Equipment (net) (5-year remaining life)		372,500
Inventory		109,500
Land		116,000
Long-term liabilities (mature 12/31/20)					165,000
Retained earnings, 1/1/17					369,150
Supplies		17,200
Totals	$	892,150		$	892,150

During 2017, Abernethy reported net income of $106,500 while declaring and paying dividends of $13,000. During 2018, Abernethy reported net income of $142,750 while declaring and paying dividends of $51,000.

Assume that Chapman Company acquired Abernethy’s common stock for $759,900 in cash. As of January 1, 2017, Abernethy’s land had a fair value of $126,400, its buildings were valued at $211,600, and its equipment was appraised at $344,500. Chapman uses the equity method for this investment.

Prepare consolidation worksheet entries for December 31, 2017, and December 31, 2018.

1. Prepare entry E to recognize current year amortization expense.

2.Prepare entry S to eliminate beginning stockholders' equity of subsidiary—the Retained Earnings account has been adjusted for 2017 income and dividends. Entry *C is not needed because equity method was applied.

3. Prepare entry A to recognize allocations relating to investment—balances shown here are as of beginning of current year [original allocation less excess amortizations for the prior period].

4. Prepare entry I to eliminate $142,750 income accrual less $4,800 amortization recorded by parent during 2018 using equity method.

5. Prepare entry E to recognize current year amortization expens

Answer 1

Solution:

Preparing Consolidation Worksheet Entries For December 31, 2017 and December 31, 2018:

Event	General Journal	Debit	Credit
1 (2017)	Entry E
	Depreciation Expense	$4,800
	Equipment	$5,600
	Buildings		$10,400
2 (2018)	Entry S
	Common Stock - Abernethy	$250,000
	Additional paid-in-capital - Abernethy	$50,000
	Retained earnings	$554,400
	Investment in Abernethy		$854,400
3	Entry A
	Land	$10,400
	Buildings	$31,200
	Goodwill	$66,750
	Equipment		$22,400
	Investment in Abernethy		$85,950
4	Entry I
	Equity in Subsidary Earnings	$137,950
	Investment in Abernethy		$137,950
	($142,750 - $4,800)
5	Entry E
	Depreciation Expense	$4,800
	Equipment	$5,600
	Buildings		$10,400

Consolidation Entries Worksheet: (Equity Method)

Fair Value of Acquisition	$759,900
Less: Book Value (Stockholder's Equity)	($669,150)
Excess Fair Value Over Book Value	$90,750

Excess Fair Value		Annual Excess
Land ($126,400 - $116,000)	$10,400
Building ($211,600 - $170,000) / 4Yrs	$41,600	$10,400
Equipment ($344,500 - $372,500) / 5Yrs	($28,000)	($5,600)
Total Assigned to Specific Accounts	$24,000
Goodwill ($90,750 - $24,000)	$66,750
Total	$90,750	$4,800

Retained Earnings (2017)
Retained Earnings (Opening)	$369,150
Add: Net Income	$106,500
Less: Dividend Declared	($13,000)
Retained Earnings Dec 31, 2017	$462,650

Retained Earnings (2018)
Retained Earnings (Opening)	$462,650
Add: Net Income	$142,750
Less: Dividend Declared	($51,000)
Retained Earnings Dec 31, 2018	$554,400