Question

1.Parent Corp ltd acquires all of Subsidiary Corp ltd. outstanding common Stock for $ 300,000 in 2016, equal with the fair value of Subsidiary Corp ltd as a whole. Fair Value of Subsidiary Corp ltd individual assets and liabilities are equal with its book value. The balance sheets show that the total book value of the share acquired equals the total stakeholder’s equity of Subsidiary Corp ltd ($200,000+$100,000). Pass the necessary journal entries and prepare the consolidated balance sheet after necessary eliminations.                                                                  [4 marks]

	Parent Corp ltd	Subsidiary Corp ltd
Assets
Cash	50,000	50,000
Accounts Receivable	75,000	50,000
Inventory	100,000	60,000
Land	175,000	40,000
Building and Equipment	800,000	600,000
Accumulated Depreciation	(400,000)	(300,000)
Investment in Subsidiary Corp Ltd	300,000
Total Assets	1,100,000	500,000
Liabilities and Stockholder’s Equity
Accounts Payable	100,000	100,000
Bonds Payable	200,000	100,000
Common Stock	500,000	200,000
Retained earnings	300,000	100,000
Total Liabilities and Equity	1,100,000	500,000

2. ABC Company purchased 35 percent ownership of XYZ Company on January 1, 2009, for $140,000. XYZ reported 2009 net income of 80,000 and paid dividends of $20,000.At December 31^st, 2009ABC determined the fair value of its investment in XYZ to be $174,000.

Required:

Give all journal entries recorded by ABC with respect to its investments in XYZ in 2009 assuming it uses

The Equity method.               [1.5 marks]

The Fair value method.          [1.5 marks]

Answer 1

Q 1
	Consolidated Balance sheet of the Parent company
	Assets	$
	Cash	100,000
	Accounts Receivable	125,000
	Inventory	160,000
	Land	215,000
	Building and Equipment	1,400,000
	Accumulated Depreciation	-700,000
	Total Assets	1,300,000
	Liabilities and Stockholder’s Equity
	Accounts Payable	200,000
	Bonds Payable	300,000
	Common Stock	500,000
	Retained earnings	300,000
	Total Liabilities and Equity	1,300,000
	Journal Entries in the books of the Parent Corporation
		$	$
Debit	Business Purchase Account	300,000
Credit	Liquidators of Subsidiary company Account		300,000
	(For Purchase of Business)
Debit	Cash Account	50,000
Debit	Accounts receivable Account	50,000
Debit	Inventory Account	60,000
Debit	Land Account	40,000
Debit	Buildings Account, net	300,000
Credit	Accounts Payable Account		100,000
Credit	Bonds Payable Account		100,000
Credit	Business Purchase Account		300,000
	(For incorporating Assets and liabilities taken over)

  

Q 2.

ABC Company is an Associate company of XYZ Company as it owns 35 percent of XYZ. ( range between 20- 50 qualifies)
You use the fair value method if you do not exert significant influence over the investee.
If you do have significant influence, you choose the equity method.
However, if you actually control the investee, you must use consolidated reporting.
	XYZ	Share of ABC
On 1st jan paid	400,000	140,000
Net Income of XYZ	80,000	28,000
Dividend declared	20,000	7,000
Total	100,000	175,000
In equity method,
The investor's proportional share of the associate company's net income increases the investment
and proportional payments of dividends decrease it.
So, uner equity method ABC Limited reports (140,000 - 7,000 + 28,000)		161,000
Under the fair value method, you create a non-current asset at the purchase price of the shares.
If possible, you periodically update the book value of the investment to reflect fair value.
So, under Fair value method, the value of investment of ABC Limited will be $ 174,000.