Question

On January 1, 2017, Palka, Inc., acquired 70 percent of the outstanding shares of Sellinger Company for $1,277,500 in cash. The price paid was proportionate to Sellinger’s total fair value, although at the acquisition date, Sellinger had a total book value of $1,500,000. All assets acquired and liabilities assumed had fair values equal to book values except for a patent (six-year remaining life) that was undervalued on Sellinger’s accounting records by $315,000. On January 1, 2018, Palka acquired an additional 25 percent common stock equity interest in Sellinger Company for $501,875 in cash. On its internal records, Palka uses the equity method to account for its shares of Sellinger.

During the two years following the acquisition, Sellinger reported the following net income and dividends:

	2017			2018
Net income	$	475,000		$	609,000
Dividends declared		160,000			200,000

Prepare a schedule showing Palka’s December 31, 2018, equity method balance for its Investment in Sellinger account.

Initial value for acquisition:

Adjusted subsidiary net income 2017:

Subsidiary dividends 2017:

Adjusted fair value of newly acquired shares:

Adjusted subsidiary 2018 net income:

Subsidiary dividends 2018:

Investment in Sellinger 12/31/18:

Answer 1

ANSWER

Initial value for 70% acquisition	1,277,500
70% of adjusted 2017 subsidiary net income (475,000-52,500)*70%	295,750
70% of subsidiary dividends 2017 (160,000*70%)	(112,000)
Adjusted fair value of newly acquired shares[(2,087,500 *25%) FROM NOTE]	521,875
95% of adjusted subsidiary 2018 net income ($609,000-52,500)*95%	528,675
95% of subsidiary dividends 2018 (200,000*95%)	(190,000)
Investment in Sellinger 12/31/18	$2,321,800

NOTE:

Acquisition-date fair value (1,277,500 /70%)	1,825,000
Sellinger net income 2017	475,000
Excess fair value amortization 2017 (315,000/6)	(52,500)
Selling per dividends 2017	(160,000)
Acquisition-date adjusted subsidiary value 12/31/17	2,087,500

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