Question

32. 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	$(600,000)	$(250,000)
    Cost of goods sold	280,000	100,000
    Depreciation expense	120,000	50,000
    Investment income	Not given	NA
    Retained earnings, 1/1/18	(900,000)	(600,000)
    Dividends declared	130,000	40,000
    Current assets	200,000	690,000
    Land	300,000	90,000
    Buildings (net)	500,000	140,000
    Equipment (net)	200,000	250,000
    Liabilities	(400,000)	(310,000)
    Common stock	(300,000)	(40,000)
    Additional paid-in capital	(50,000)	(160,000)

    page 144

    Assume that Mergaronite took over Hill on January 1, 2014, by issuing 7,000 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 $20,000, its buildings were overvalued by $30,000, and equipment was undervalued by $60,000. The buildings had a 10-year remaining life; the equipment had a 5-year remaining life. A customer list with an appraised value of $100,000 was developed internally by Hill and was to be written off over a 20-year period.

    1. Determine and explain the December 31, 2018, consolidated totals for the following accounts:

       Revenues	Amortization Expense	Customer List
       Cost of Goods Sold	Buildings	Common Stock
       Depreciation Expense	Equipment	Additional Paid-In Capital

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

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

Answer 1

ANSWER

Solution (a): Workings to determine the consolidated totals as on December 31 2018 Revenues Particulars Revenues of MerEaranite Revenues of Hill Amount $6,00,000 $2,50,000 Patent Particulars Patent value as on 2014 Less: Amortization for 2018 Less: Amortization for 4 years Total Amount $1,00,000 Customer ist developed by Hill Inc., is considered as patent $5,000 Each Year Amortization expense is ($ 100,000/20) $20,000 Amortization expense for (2014,2015,2016,2017) $75,000 Value of Customer list as on 31st December 2018 Total $8,50,000 Amount Amortization Expense Particulars Amortization Expense for 2018 ($ 100,000/20 = $ 5,000) Cost of Goods Sold Particulars Cost of Goods Sold of Mergaronite Cost of Goods Sold of Hill $5,000 Amount $2,80,000 $1,00,000 Total $5,000 Total $3,80,000 Common Stock Particulars Common Stock of Mergaronite Building Particulars Building of Mergaronite Building of Hill Over valuation of Building Total Amount $5,00,000 $1,40,000 $30,000 $6,70,000 Amount $3,00,000 Here we consider the common stock of Parent company only. Because the Mergaronite took over Hill by issuing common stock in Mergaronite Company. Total $3,00,000

Depreciation Expense Particulars Depreciation Expense of Mergaronite Depreciation Expense of Hill Depreciation on the over valued building Depreciation on undervalued Equipment Amount $1,20,000 $50,000 $3,000 $12,000 Equipment Particulars Equipment of Mergaranite Equipment of Hill Amount $2,00,000 $2,50,000 Equipment that was undervalued by $ 60,000 need not do any adjustment. Equipment was undervalued on January 2014 and by the end of 2018 the 5 years $4,50,000 period is completed. Total Total $1,85,000 Additional Paid in Capital Particulars Additional Paid in Capital of Mergaronite Amount $50,000 Here we consider the Additional Paid in capital of Parent company only. Because the Mergaronite took over Hill by issuing Additional Paid in Capital in Mergaronite $50,000 company. Total Solution (b): Here we are not dealing with the Parent's company Investment account and there are no reiprocity entries required to be posted. No adjustments are to be made on earnings on equity and dividends. Hence the method used by the Parent company does not matters.

Solution (C): Consolidation entries if Parent company is using equity method Elimination Entry Passed to Eliminate Investment A/C in subsidiary Retained Earnings A/C Dr Common Stock A/C Dr Additional Paid in Capital A/C Dr $6,00,000 $40,000 $1,60,000 To Investment A/C $8,00,000 Land A/C Dr Equipment A/C Dr Customer List A/C Dr $20,000 $12,000 $80,000 To Building Net A/C To Investment in Hill A/C $18,000 $94,000 Investment in Hill A/C Dr $40,000 To Dividend Paid A/C $40,000 Depreciation A/C Dr Amortization A/C Dr Building A/C Dr $12,000 $5,000 $3,000 To Equipment A/C To Customer List A/C $12,000 $5,000

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