Question

Following are selected accounts for Mergaronite Company and Hill, Inc., as of December 31, 2018. Several of Mergaronite’s accounts have been omitted. Credit balances are indicated by parentheses. Dividends were declared and paid in the same period.

		Mergaronite				Hill
Revenues		$	(602,000	)		$	(240,000	)
Cost of goods sold			260,000				114,000
Depreciation expense			120,000				44,000
Investment income			NA				NA
Retained earnings, 1/1/18			(892,000	)			(602,000	)
Dividends declared			120,000				44,000
Current assets			200,000				662,000
Land			318,000				94,000
Buildings (net)			500,000				140,000
Equipment (net)			194,000				248,000
Liabilities			(390,000	)			(320,000	)
Common stock			(294,000	)			(36,000	)
Additional paid-in capital			(54,000	)			(908,000	)

Assume that Mergaronite took over Hill on January 1, 2014, by issuing 7,600 shares of common stock having a par value of $10 per share but a fair value of $100 each. On January 1, 2014, Hill’s land was undervalued by $19,800, its buildings were overvalued by $29,200, and equipment was undervalued by $61,800. The buildings had a 10-year remaining life; the equipment had a 5-year remaining life. A customer list with an appraised value of $94,000 was developed internally by Hill and was to be written off over a 20-year period.

A.) Determine the December 31, 2018, consolidated totals for the following accounts:

Totals Revenues $ Cost of goods sold $ Depreciation expense $ Amortization expense $ Buildings $ Equipment $ Customer list $ Common stock $ Additional paid-in capital $

B.) In requirement (a), can the consolidated totals be determined without knowing which method the parent used to account for the subsidiary?

	Consolidated totals

C.) If the parent uses the equity method, what consolidation entries would be used on a 2018 worksheet?

Prepare Entry S to eliminate the beginning stockholders' equity of the subsidiary.

	Event Account Debit Credit S

Prepare Entry A to recognize the unamortized allocation balances as of the beginning of the current year.

Event Account Debit Credit A

Prepare Entry I to remove the equity income recognized during the year - equity method.

Event Account Debit Credit I Prepare Entry D to remove the Intra-entity dividend declarations. Event Account Debit Credit D Prepare Entry E to recognize the excess acquisition-date fair-value amortizations for the period. Event Account Debit Credit E

Answer 1

A.) Determine the December 31, 2018, consolidated totals for the following accounts:

Particulars	Amount	Exaplanation
Revenue	($ 842,000)	$ 602000 + $ 240,000 (add Parent and subsidiary revenues
Cost of Goods Sold	$ 374,000	$ 260,000 + $ 114,000 (add Parent and subsidiary COGS)
Depreciation Expense	$ 173,440	$ 120,000 + $ 44,000 - $ 2,920 + $ 12,360
Amotization Expense	$ 4,700	$ 94,000 / 20
Building Net	$ 625,400	$ 500,000 + $ 140,000 - $ 29,200 +($ 2,920 * 5year) Since building is overvalued $ 29,200 to be added and its depreciation for last 5 years to be deducted to arrive at correct value.
Equipment Net	$ 442,000	$ 194,000 + $ 248,000 At the end of 5th year the life of the equipment is exhousted, hence no need for amortization.
Customer List	$ 70,500	$ 94,000 - ( $ 4,700 * 5 ) Appraised value less amortization of last 5 years
Common Stock	($294,000)	Only to consider parent's balance
Additional Paid in Capital	($ 54,000)	Only to consider parent's balance

Note : Fair valu allocation and amortization

Builiding = $ 29,200 / 10 years = ( $ 2920 )

Equipment = $ 61,800 / 5 years = $ 12,360

Customer List = $ 94,000 / 20 years = $ 4700

Total Amortization = $ 14,140

Ans B Yes the consolidated totals can be determined without knowing which method the parent used to account for the subsidiary.Beacause the consolidated totals are used for consolidated worksheets.

If the parent uses the equity method, what consolidation entries would be used on a 2018 worksheet?

   In the Books of Mergaronite

   General Journal

Event	Account	Debit	Credit
Entry S	Common Stock A/c Dr (Hill )	$ 36,000
	Additional Paid in Capital A/c Dr (Hill )	$ 908,000
	Retained Earnings A/c Dr.	$ 602,000
	To Investment In Hill A/c		$ 1,546,000
	(To eliminate begining stockholder's equity of the subsidiary)
Entry A	Land A/c Dr	$ 19,800
	Equipment net A/c Dr [$ 61,800 / 5 *(5-4 )]	$ 12,360
	Customer List net A/c Dr. ( $ 94000 / 20 * 920-4)	$ 75,200
	To Building net A/c    (29,200 / 10 * (10-4)		$ 17520
	To Investment in Hill A/c		$ 89,840
	(To recognize unamortized allocation balances as on beginning of current year)
Entry I	Investment Income A/c Dr ($240000-$114000-$44000- $14140) (Investment Income = Revenue - COGS - Depreciation - Amortization Expense for the year)	$ 67,860
	To Investment in Hill		$ 67860
	(To remove equity income recognized during year-equity method accrual [based on subsidiary's income] less amortization for the year] )
Entry D	Investment in Hill A/c Dr.	$ 44,000
	To Dividend Paid		$ 44,000
	(To remove intercompany dividend payments )
Entry E	Amortization Expense A/c Dr.	$ 4,700
	Deprecition Expense A/c Dr.($ 12360 -$ 2920)	$ 9440
	Building A/c Dr	$ 2920
	To Customer List A/c		$ 4700
	To Equipment A/c		$ 12360
	(To recognize excess acquisition-date fair-value amortizations for the period)