Question

On January 1, 2012, P Company purchased 95% of the outstanding common stock of S Company for $160,000. At that time, Sessions' stockholders' equity consisted of common stock, $120,000; other contributed capital, $10,000; and retained earnings, $23,000. Any difference between the implied value of the company and the book value is attributable to goodwill. On December 31, 2012, the two companies' trial balances were as follows:

				P	S
Cash				62,000	30,000
Accounts Receivable				32,000	29,000
Inventory				30,000	16,000
Investment in Sessions Company				165,700	-
Plant and Equipment				105,000	82,000
Land				29,000	34,000
Dividends Declared				20,000	20,000
Cost of Goods Sold				130,000	40,000
Operating Expenses				20,000	14,000
Total Debits				593,700	265,000
Accounts Payable				19,000	12,000
Other Liabilities				10,000	20,000
Common Stock				180,000	120,000
Other Contributed Capital				60,000	10,000
Retained Earnings, 1/1				40,000	23,000
Sales				260,000	80,000
Equity in earnings of Sessions				24,700	-
Total Credits				593,700	265,000

PERFORM USING COST METHOD, THEN PERFORM USING EQUITY METHOD

Step 1.Prepare a T-Account to keep track of P's Investment in S. Record the date of acquisision entry.

Step 2:Prepare the Computation and Allocation of Difference Schedule.

Step 3: Prepare the investment elimination entries as of the date of acquisition and year after acquisition.

Step 4: Prepare the consolidating financial statement workpaper.

Answer 1

Step:1

Investment in S:
Debit$		Credit$
Jan 1 2012	160000
Investment in Subs	5700
Ending Balance	165700

Step:2

	Parent Share	NCI Share	Total Value
	95%	5%	100%
Purchase Price	160000	8421	168421
Less: Book Value:
Common Stock	114000	6000	120000
Other Cont Capital	9500	500	10000
Retained Earning	21850	1150	23000
Subsidiary Income (Pre-acquisition)			0
Dividend (Pre-Acquisition)			0
			0
Total Book Value	145350	7650	153000
Diff between Purchase price and Book value	14650	771	15421
Allocated:
Goodwill	14650	771	15421

Step:3

	Debit$	Credit$
Equity Subsidiary Income	24700
Dividend Declared		19000
Investment in Subs		5700
Other Contributed Capital	10000
Retained Earning	23000
Common Stock	120000
Goodwill	15421
Difference Cost and book
Investment in Subs		160000
Non Controlling Interest		8421

Step 4:

Income Statement			Consolidation
	Parent	Subsidiary	Debit	Credit	NCI	Balance
Sale	260000	$         80,000				$       340,000
Equity In Subsidiary Income (Equity Methotd)	24700		$         24,700			$                   -
Dividend (Cost Method)						$                   -
-Total Revenue	284700	$         80,000				$       340,000
Cost of Goods Sold	130000	$         40,000				$       170,000
Depreciation Expense						$                   -
Impairment Loss						$                   -
Operating expense	20000	$         14,000				$         34,000
-Total Cost and Expense	150000	$         54,000				$       204,000
Net Income	134700	$         26,000				$       136,000
Non Controlling Interest					$         1,300	$          -1,300
Net Income	134700	$         26,000	$                   -	$                   -	$         1,300	$       134,700
Retained Earning Statement
Retained Earning - Opening
-Parent	40000					$         40,000
-Subs		$         23,000	$         23,000			$                   -
Net Income	134700	$         26,000	$                   -	$                   -	$         1,300	$       134,700
Dividends declared	-20000	$        -20,000		$        -19,000	$       -1,000	$        -20,000
Retained Earning - Closing	154700	$         29,000	$         23,000	$        -19,000	$            300	$       154,700
Balance Sheet
Cash	62000	$         30,000				$         92,000
Accounts Receivable	32000	$         29,000				$         61,000
Inventory	30000	$         16,000				$         46,000
Investment in Subs	165700			$            5,700		$                   -
				$       160,000
Difference cost and book (Dummy)			$         15,421	$         15,421		$                   -
Plant Equipment	105000	$         82,000				$       187,000
Land	29000	$         34,000				$         63,000
						$                   -
Goodwill			$         15,421			$         15,421
-Total Assets	423700	$       191,000	$         30,842	$       181,121	$                -	$       464,421
Accounts Payable	19000	$         12,000				$         31,000
Other Liabilities	10000	$         20,000				$         30,000
						$                   -
						$                   -
						$                   -
Common Stock	180000	$       120,000	$       120,000			$       180,000
Other Contributed Capital	60000	$         10,000	$         10,000			$         60,000
Retained Earning	154700	$         29,000	$         23,000	$        -19,000	$            300	$       154,700
Non Controlling Interest-Opening					$         8,421
Non Controlling Interest-Closing					$         8,721	$            8,721
-Total Liabilites and Equity	423700	$       191,000	$       153,000	$        -19,000		$       464,421