Question

Assume that the parent company acquires its subsidiary by exchanging 84,000 shares of its $2 par value Common Stock, with a fair value on the acquisition date of $38 per share, for all of the outstanding voting shares of the investee. In its analysis of the investee company, the parent values all of the subsidiary’s assets and liabilities at an amount equaling their book values except for an unrecorded Trademark with a fair value of $240,000, an unrecorded Video Library valued at $600,000, and Patented Technology with a fair value of $125,000.

a. Prepare the journal entry that the parent makes to record the acquisition.

General Journal
Description	Debit	Credit
AnswerEquity investmentAPICCashRetained earningsGoodwill	Answer	Answer
Common stock	Answer	Answer
AnswerEquity investmentAPICCashRetained earningsGoodwill	Answer	Answer

b. Given the following acquisition-date balance sheets of the parent and the subsidiary, prepare the consolidation entries.

Balance Sheet						Parent		Subsidiary
Assets
Cash						$514,020		$265,160
Accounts receivable						450,300		633,360
Inventory						650,000		813,540
Equity investment						3,192,000		-
Property, plant & equipment						10,600,000		1,505,140
						$15,406,320		$3,217,200
Liabilities and stockholders' equity
Accounts payable						$150,480		$177,800
Accrued liabilities						176,640		309,400
Long-term liabilities						3,840,000		910,000
Common stock						428,400		182,000
APIC						3,276,000		227,500
Retained earnings						7,534,800		1,410,500
						$15,406,320		$3,217,200

Consolidation Journal
	Description	Debit	Credit
[E]	Common stock	Answer	Answer
	APIC	Answer	Answer
	AnswerEquity investmentAPICCashRetained earningsGoodwill	Answer	Answer
	AnswerEquity investmentAPICCashRetained earningsGoodwill	Answer	Answer
[A]	Trademark	Answer	Answer
	Video library	Answer	Answer
	Patented technology	Answer	Answer
	AnswerEquity investmentAPICCashRetained earningsGoodwill	Answer	Answer
	AnswerEquity investmentAPICCashRetained earningsGoodwill	Answer	Answer

c. Prepare the consolidation spreadsheet.

Consolidation Worksheet
			Parent		Subsidiary			Debit			Credit			Consolidated
Assets
Cash			$514,020		$265,160									$Answer
Accounts receivable			450,300		633,360									Answer
Inventory			650,000		813,540									Answer
Equity investment			3,192,000		-					[E]	$Answer			Answer
										[A]	Answer
PPE, net			10,600,000		1,505,140									Answer
Trademark							[A]	Answer						Answer
Video library							[A]	Answer						Answer
Patented technology							[A]	Answer						Answer
Goodwill			-		-		[A]	Answer						Answer
			$15,406,320		$3,217,200									$Answer
Liabilities and equity
Accounts payable			$150,480		$177,800									$Answer
Accrued liabilities			$176,640		$309,400									Answer
Long-term liabilities			$3,840,000		$910,000									Answer
Common stock			$428,400		$182,000		[E]	$Answer						Answer
APIC			$3,276,000		$227,500		[E]	$Answer						Answer
Retained earnings			$7,534,800		$1,410,500		[E]	$Answer						Answer
			$15,406,320		$3,217,200			$Answer			$Answer			$Answer

d. Where were the intangible assets on the parent or subsidiary’s balance sheets?

On the parent's balance sheet embedded in the equity investment account. On the subsidiary's balance sheet, each intangible asset is listed.

On the parent's balance sheet embedded in the equity investment account. After the consolidation process is complete, each intangible asset is listed on the consolidated balance sheet.

On the subsidiary's balance sheet embedded in retained earnings. After the consolidation process is complete, each intangible asset is listed on the consolidated balance sheet.

Answer 1

a	Journal entry that the parent makes to record the acquisition
	Equity Investment	$3,192,000
	Common Stock		$168,000
	Additional Paid in Capital		$3,024,000
	Equity Investment = 84000 shares x $38 each
	Common stock = 84000 shares x $2 each
	APIC = 84000 shares x $36 each
b	Consolidation entries
[E]	Common Stock	$182,000
	APIC	$227,500
	Retained earnings	$1,410,500
	Equity Investment		$1,820,000
[A]	Trademark	$240,000
	Video Library	$600,000
	Patented Technology	$125,000
	Goodwill	$407,000
	Equity Investment		$1,372,000
c	Consolidation Worksheet
		Parent	Subsidiary	Debit	Credit	Consolidated
	Assets
	Cash	$514,020	$265,160			$779,180
	Accounts receivable	$450,300	$633,360			$1,083,660
	Inventory	$650,000	$813,540			$1,463,540
	Equity Investment	$3,192,000			$1,820,000	$1,372,000
					$1,372,000	-$1,372,000
	PPE, net	$10,600,000	$1,505,140			$12,105,140
	Trademark			$240,000		$240,000
	Video Library			$600,000		$600,000
	Patented Technology			$125,000		$125,000
	Goodwill			$407,000		$407,000
		$15,406,320	$3,217,200			$16,803,520
	Liabilities and Equity
	Accounts Payable	$150,480	$177,800			$328,280
	Accrued Liabilities	$176,640	$309,400			$486,040
	Long-term liabilities	$3,840,000	$910,000			$4,750,000
	Common Stock	$428,400	$182,000	$182,000		$428,400
	APIC	$3,276,000	$227,500	$227,500		$3,276,000
	Retained Earnings	$7,534,800	$1,410,500	$1,410,500		$7,534,800
		$15,406,320	$3,217,200	$3,192,000	$3,192,000	$16,803,520
d	on the parent's balance sheet embedded in the equity investment account. After the consolidation process is complete,
	each intangible asset is listed on the consolidated balance sheet