Question

On January 1, 2017, Palka, Inc., acquired 70 percent of the outstanding shares of Sellinger Company for $1,625,400 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 $2,060,000. 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 $252,000. On January 1, 2018, Palka acquired an additional 25 percent common stock equity interest in Sellinger Company for $608,125 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:

	2017			2018
Net income	$	442,500		$	561,500
Dividends declared		190,000			230,000

Show Palka’s journal entry to record its January 1, 2018, acquisition of an additional 25 percent ownership of Sellinger Company shares.

Prepare a schedule showing Palka’s December 31, 2018, equity method balance for its Investment in Sellinger account.

A. Record the acquisition of an additional 25 percent ownership of Sellinger Company shares on January 01, 2018

B.  Prepare a schedule showing Palka’s December 31, 2018, equity method balance for its Investment in Sellinger account. (Amounts to be deducted should be indicated with a minus sign.)

Initial Value for Acuqisition

Adjusted subsidiary net income 2017

Subsidiary dividends 2017

Adjusted fair value of newly acquired shares

Adjusted subsidiary 2018 net income

Subsidiary dividends 2018

Investment in Sellinger 12/13/18

Answer 1

A. Journal entry for additional acquisition of 25% ownership of Sellinger Company on January 01, 2018
Acquisition date fair value	$1,625,400	70%	$2,322,000
Sellinger net income for 2017			$442,500
excess fair value amortization 2017			(42,000)
Sellinger dividend 2017			(190,000)
Acquisition date adjusted subsidiary value on 31/12/2017			$2,532,500
Percent acquired on 1/1/2018			25%
Acquisition date based value for newly acquired shares			$633,125
Acquisition price paid for 25% shares			$608,125
Palka's APIC			$25,000
Investment in Sellinger	$633,125
Cash		$608,125
APIC		$25,000
B. Schedule showing Palka's December 31, 2018, equity method balance for its Investment in
Sellinger account
Initial Value of acquisition -70%	$1,625,400
Adjusted subsidiary net income 2017 - 70%	$280,350
Subsidiary dividend 2017-70%	($133,000)
Adjusted fair value of newly acquired shares	$633,125
Adjusted subsidiary 2018 net income -95%	$493,525
Subsidiary dividend 2018 - 95%	($218,500)
Investment in Sellinger 12/31/2018	$2,680,900
Working Note:
Fair value amortization for Patent
= $252000/6 years
= $ 42000 per year
Adjusted subsidiary net income 2017
Net income	442,500
Less: Amortization for Patent	(42,000)
Adjusted net income	400,500
Share of Palka-70%	280,350
Adjusted subsidiary net income 2018
Net income	561,500
Less: Amortization for Patent	(42,000)
Adjusted net income	519,500
Share of Palka-95%	493,525