Question

On January 1, 2017, Palka, Inc., acquired 70 percent of the outstanding shares of Sellinger Company for $1,613,500 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 $2,040,000. 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 $255,000. On January 1, 2018, Palka acquired an additional 25 percent common stock equity interest in Sellinger Company for $655,000 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	$	577,500		$	719,500
Dividends declared		180,000			210,000

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

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

Answer 1