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 S to eliminate stockholders' equity accounts of subsidiary.

2. Prepare entry A to recognize allocations attributed to fair value of specific accounts at acquisition date with residual fair value recognized as goodwill.

3. Prepare entry I to eliminate $106,500 income accrual for 2017 less $4,800 amortization recorded by parent using equity method.

4. Prepare entry D to eliminate intra-entity dividend transfers.

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

6. 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.

7. 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].

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

9. Prepare entry D to eliminate intra-entity dividend transfers.

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

Answer 1

1. Entry to eliminate stockholders' accounts of subsidiary
Date	Acount Title	Debit	Credit
Jan.1 ,2017	Common Stock - Abernethy	250000
	Additional paid-in-capital - Abernethy	50000
	Retained earnings -Abernethy	369150
	Investment in Abernethy		669150
2. Entry to recognise allocation of excess value
Date	Acount Title	Debit	Credit
Jan.1 ,2017	Land	10400
	Buildings	41600
	Goodwill	66750
	Investment in Abernethy		90750
	Equipment		28000
3.Entry to eliminate net income and amortization of excess of fair value
Date	Acount Title	Debit	Credit
Dec.31, 2017	Amotization expense	4800
	Investment in Abertheny	101700
	Equity income from Abetheny		106500
4.Entry to eliminate dividend paid by abertheny
Date	Acount Title	Debit	Credit
Dec.31, 2017	Cash	13000
	Investment in Abertheny		13000

Working:
Net Assets
Cash	66750
Accounts Receivable	40200
Inventory	109500
Supplies	17200
Land	116000
Buildings	170000
Equipment	372500
	892150
Les: Liabilities
Accounts Payable	58000
Long term liabilities	165000
	223000
Net Assets	669150
Exces fair value
Land (126400-116000)	10400
Buildings(211600-170000)	41600
Equipment(344500-372500)	-28000
Total value acquired	693150
Price Paid	759900
Goodwill	66750