Question

Assume that Big Company decides to acquire 80% Little Company for $500,000. Prepare the appropriate journal entries.
Big Company Balance Sheet			Which accounting method is most appropriate for representing an investment of this type?					Prepare Elimination Entries for Stock Acquisition
Assets, Liabilities & Equities	Book Value							Account	DR	CR
Cash	$2,100,000
AR	$10,000
Inventory	$200,000
Land	$40,000
PP&E	$400,000
Accumulated Depreciation	-$150,000
Patent	$0
Total Assets	$2,600,000		Prepare the journal entries for a 80% Asset Acquisition (using Big Company Cash)
AP	$100,000
Common Stock ($10 par)	$450,000		Account		DR	CR
Additional Paid In Capital	$600,000		Investment in little		$500,000
Retained Earnings	$1,450,000		Cash			$500,000
Total Liabilities & Equity	$2,600,000		Prepare the journal entries for a 80% Acquisition by issuing 10,000 shares of Big Company Stock					Big Company Balance Sheet (Consolidated)
Little Company Balance Sheet								Assets, Liabilities & Equities
Assets, Liabilities & Equities	Book Value		Account		DR	CR		Cash
Cash	$35,000		Investment in Little		$500,000			AR
AR	$10,000		Common Stock			$100,000		Inventory
Inventory	$65,000		Additional Paid In Capital			$400,000		Land
Land	$40,000		Allocation of Excess Schedule					PP&E (net)
PP&E	$400,000							Accumulated Depreciation
Accumulated Depreciation	-$150,000							Goodwill
Patent	$0							Patent
Total Assets	$400,000							Total Assets
AP	$100,000							AP
Common Stock	$100,000							Common Stock ($10 par)
Additional Paid In Capital	$50,000							Additional Paid In Capital
Retained Earnings	$150,000							Retained Earnings
Total Liabilities & Equity	$400,000							NCI
								Total Liabilities & Equity
Assume that all noncash assets have a Fair Value that is 10% greater than Book Value

Assignment Option #2: Acquisitions with Ownership < 100% and BV < FMV

Using the data in the Option 2 Spreadsheet (linked at the bottom of the page), perform the accounting required for the acquisition of Little, Inc. by Big, Inc. This is an 80% acquisition, where the book value of the assets acquired is less than the acquisition price. Within the worksheet, you are to:

Select an accounting method (either cost or equity) and explain why you selected this method

Perform the required journal entries

Complete the consolidation worksheet

Prepare the consolidated balance sheet in good form

Answer 1

1. Which accounting method is most appropriate for representing investment of this type?
Equity method is most appropriate for this type of investment.
Equity method is used when the acquiring company have a significant control over the
acquired company (more then 50%). Equity method is also used even if the investor have
a significant influence over the investee (between 20% to 50% voting stock).
In this case, Big Inc. acquired 80% of the voting stock thus Equity method will be used.
Under this method, initial investment is recorded at cost, later it changes with earnings and dividend distribution. Value of investment will increase will earnings and decrease with dividend received.
2. Perform the required journal entries
Journal entry for 80% asset acquisition
Cash		28,000
AR		8,000
Inventory		52,000
Land		32,000
PP&E, net		200,000
Goodwill		180,000
Cash			500,000
Journal entry for 80% acquisition by issuing 10000 shares of Big company stock
Investment in Little company			500,000
Common stock				100,000
Additional Paid in Capital				400,000
Allocation of Excess Schedule
Value of Company			625,000	(500,000/80%)
Less: Book value of assets
Cash		35,000
AR		10,000
Inventory		65,000
Land		40,000
PP&E, net		250,000
Less: AP		(100,000)	300,000
Excess			325,000
Allocation of excess:
Goodwill			325,000
Big Company share in Goodwill			260,000
3. Elimination entry for Stock acquisition
Cash		35,000
AR		10,000
Inventory		65,000
Land		40,000
PP&E, net		250,000
Goodwill		260,000
AP			100,000
Investment in Little			500,000
Minority Interest			60,000
4.Consolidated Balance sheet
Cash			$2,135,000
AR			$20,000
Inventory			$265,000
Land			$80,000
PP&E			$800,000
Less: Accumulated Depreciation			($300,000)
Patent			$0
Goodwill			$260,000
Total Assets			$3,260,000
AP			$200,000
Common Stock ($10 par)			$550,000
Additional Paid in Capital			$1,000,000
Retained Earnings			$1,450,000
NCI			$60,000
Total Liabilities			$3,260,000