Question

On January 1, 2017, Palka, Inc., acquired 70 percent of the outstanding shares of Sellinger Company for $1,290,800 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 $1,570,000. 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 $264,000. On January 1, 2018, Palka acquired an additional 25 percent common stock equity interest in Sellinger Company for $475,000 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	$	480,000		$	593,000
Dividends declared		200,000			240,000

1. Show Palka’s journal entry to record its January 1, 2018, acquisition of an additional 25 percent ownership of Sellinger Company shares.

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

Answer 1

Answer-1:

Account Title	Debit	Credit
Investment in Sellinger Company	$    520,000
Cash		$ 475,000
Additional paid in capital-Sellinger Company		45,000

Fair value = $1,290,800 / 0.70 = $1,844,000 Annual amortization = $264,000 / 6 = $44,000 Fair value at the time of the second acquisition = Initial fair value + Net income - Dividends - Amortization Fair value at the time of the second acquisition = $1,844,000 +480,000 - 200,000 - 44,000 Fair value at the time of the second acquisition = $2,080,000 Book value = Fair value at the time of the second acquisition * 25% Book value of stock price = $2,080,000 * 25% = $520,000 Additional paid-in capital = Book value - Acquisition price Additional paid-in capital = $520,000 - 475,000 = $45,000

Answer-2:

Schedule for Palka's Investment in Sellinger company
Fair value of 2017 acquisiion	$ 1,290,800
70% of adjusted subsidiary income	305,200
70% of 2017 subsidiary dividend	140,000
Adjusted fair value of 2018 acquisition	520,000
95% of adjusted subsidiary income	521,550
95% of 2018 subsidiary dividend	228,000
Investment in Sellinger Company	$ 2,269,550

For 2017: Company Palka's share of earnings = (Net income - Amortizations) * Percent owned Company Palka's share of earnings = ($480,000 - 44,000) * 0.70 = $305,200 Company Palka's share of dividend paid = Dividend * Percent owned Company Palka's share of dividend paid = $200,000 * 0.70 = $140,000 Total interest in Sellinger company = 25% of acquisition percent + Acquisition percent = 25% + 70% = 95% For 2018: Company Palka's share of earnings = (Net income - Amortizations) * Percent owned Company Palka's share of earnings = ($593,000 - 44,000) * 0.95 = $521,550 Company Palka's share of dividend paid = Dividend * Percent owned Company Palka's share of dividend paid = $240,000 * 0.95 = $228,000 Investment balance =$1,290,800 + 520,000 + 305,200 + 521,550 - 140,000 - 228,000 = $2,269,550