Question

48. 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 $38 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.

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..............................................         3,192,000                                —

Property, plant and equipment (PPE), net.............. 10,600,000                                 1,505,140

$15,406,320                            $3,217,200

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                                   182,000

APIC........................................................                     3,276,000                               227,500

Retained earnings .............................................         7,534,800                                1,410,500

$15,406,320                            $3,217,200

c. Prepare the consolidation spreadsheet.

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

Answer 1

Part A

Account titles and explanation	Debit	Credit
Equity investment (84000*38)	3192000
Common stock (84000*2)		168000
APIC (84000*36)		3024000
(to record the acquisition)

Part B

Entry	Account titles and explanation	Debit	Credit
[E]	Common stock	182000
	APIC	227500
	Retained earnings	1410500
	Equity investment		1820000
	(to eliminate the stockholders’ equity of the subsidiary as of the acquisition date)
[A]	Trademark	240000
	Video library	600000
	Patented technology	125000
	Goodwill (3192000-240000-600000-125000-1820000)	407000
	Equity investment		1372000
	(to record the Trademark, Video Library, and Patented Technology as intangible assets)

Part C

			Elimination entries
	Parent	Subsidiary	Dr.	Cr.	Consolidated
Assets:
Cash	514020	265160			779180
Accounts receivable	450300	633360			1083660
Inventory	650000	813540			1463540
Equity investment	3192000			3192000	0
PPE, net	10600000	1505140			12105140
Trademark			240000		240000
Video library			600000		600000
Patented technology			125000		125000
Goodwill			407000		407000
	15406320	3217200			16803520
Liabilities and Stockholders’ Equity:
Accounts payable	150480	177800			328280
Accrued liabilities	176640	309400			486040
Long-term liabilities	3840000	910000			4750000
Common stock	428400	182000	182000		428400
APIC	3276000	227500	227500		3276000
Retained earnings	7534800	1410500	1410500		7534800
	15406320	3217200			16803520

Part D

Four intangible assets are recognized in the consolidation process: Trademark, Video Library, Patented Technology and Goodwill. Earlier, they were embedded in the Equity investment account on the Parent’s balance sheet. Now, they are explicitly recognized in the consolidation process.