Question

Consolidation at date of acquisition (purchase price greater than book value, acquisition journal entries
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 $41 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
Equity investmentAPICCashRetained earningsGoodwill
Common stock
Equity investmentAPICCashRetained earningsGoodwill

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						3,444,000		-
Property, plant & equipment						10,600,000		1,805,140
						$15,658,320		$3,517,200
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		282,000
APIC						3,528,000		327,500
Retained earnings						7,534,800		1,510,500
						$15,658,320		$3,517,200

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

c. Prepare the consolidation spreadsheet.

Consolidation Worksheet
			Parent		Subsidiary			Debit			Credit			Consolidated
Assets
Cash			$514,020		$265,160
Accounts receivable			450,300		633,360
Inventory			650,000		813,540
Equity investment			3,444,000		-					[E]
										[A]
PPE, net			10,600,000		1,805,140
Trademark							[A]
Video library							[A]
Patented technology							[A]
Goodwill			-		-		[A]
			$15,658,320		$3,517,200
Liabilities and 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		$282,000		[E]
APIC			$3,528,000		$327,500		[E]
Retained earnings			$7,534,800		$1,510,500		[E]				-
			$15,658,320		$3,517,200

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

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

B. 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.

C. 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

3,444,000 Acquisition paid (84,000 shares * $ 41) Less: Book value of Subsidiary Common stock APIC Retained earnings Excess of Fair value over book value Allocation of excess value to specified assets Trademark Video library Patented Technology Goodwill (282,000) (327,500) (1,510,500) 1,324,000 (240,000) (600,000) (125,000) 359,000 General Journal Credit Debit 3,444,000 Description Equity investment Common stock (84,000 x $ 2) APIC (3,444,000 - 168,000) 168,000 3,276,000 Credit [E] Consolidation Journal Description Common stock APIC Retained earnings Equity Investment Debit 282,000 327,500 1,510,500 2,120,000 [A] Trademark Video library Patented Technology Goodwill Equity Investment 240,000 600,000 125,000 359,000 L 1,324,000

c) Consolidation spreadsheet Parent Subsidiary Debit Credit Consolidated Assets Cash Accounts receivable Inventory Equity Investment 514,020 450,300 650,000 3,444,000 265,160 633,360 813,540 779,180 1,083,660 1,463,540 2,120,000 1,324,000 [A] [E] 10,600,000 1,805,140 TA PPE, net Trademark Video library Patented technology Goodwill [A] 240,000 600,000 125,000 359,000 12,405,140 240,000 600,000 125,000 359,000 17,055,520 [A] [A] 15,658,320 3,517,200 Liabilities and equity Accounts payable Accrued liabilities Long-term liabilities Common stock APIC Retained earnings 150,480 176,640 3,840,000 428,400 3,528,000 7,534,800 15,658,320 177,800 309,400 910,000 282,000 [E] 327,500 [E] 1,510,500 [E] 3,517,200 282,000 82 000 327,500 1,510,500 3,444,000 328,280 486,040 4,750,000 428,400 3,528,000 7,534,800 17,055,520 3,444,000 d) B. 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.