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:

Accounts payable				$	59,900
Accounts receivable	$	43,700
Additional paid-in capital					50,000
Buildings (net) (4-year remaining life)		123,000
Cash and short-term investments		80,500
Common stock					250,000
Equipment (net) (5-year remaining life)		270,000
Inventory		138,500
Land		118,500
Long-term liabilities (mature 12/31/20)					175,000
Retained earnings, 1/1/17					257,100
Supplies		17,800
Totals	$	792,000		$	792,000

During 2017, Abernethy reported net income of $112,000 while declaring and paying dividends of $14,000. During 2018, Abernethy reported net income of $163,250 while declaring and paying dividends of $54,000.

Assume that Chapman Company acquired Abernethy’s common stock for $651,550 in cash. As of January 1, 2017, Abernethy’s land had a fair value of $132,100, its buildings were valued at $166,600, and its equipment was appraised at $242,750. Chapman uses the equity method for this investment.

Prepare consolidation worksheet entries for December 31, 2017, and December 31, 2018. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Types of accounting for consolidation includes methods like equity method, consolidation method,Cost method etc. The equity method is used when the investor holds significant influence over investee, but does not exercise full control over it, as in the relationship between parent and subsidiary. But when an investor exercises full control of the company it invests in, the investing company may be known as a parent company to the investee. The latter is then known as the subsidiary. In such a case, investments made by the parent company in the subsidiary are accounted for using the consolidation method.

Based on the details provided in question, we should solve it using consolidation method, but the question requires the equity method to answer this question. So let us proceed in answering the question

Unlike in the consolidation method, there is no consolidation and elimination process. Instead, the investor will report a proportionate share of the investee’s equity as an investment (at cost). Profit and loss from the investee increase the investment account by an amount proportionate to the investor’s shares in the investee. This is known as the “equity pick-up”. Dividends paid out by the investee are deducted from this account.

Consolidation Entries:

As on Investment Date (01/01/2017)

Investment in Abernethy Dr $ 651550

Cash Cr $ 651550

As on 31/12/2017:

1. Cash Dr $ 14000

Investment in Abernethy Cr $ 14000

2. Investment in Abernethy Dr $ 112000

Investment Revenue Cr $ 112000

As on 31/12/2018:

1. Cash Dr $ 54000

Investment in Abernethy Cr $ 54000

2. Investment in Abernethy Dr $ 163250

Investment Revenue Cr $ 163250