Question

Consolidation at date of acquisition (purchase price greater than book value, acquisition journal entries, deferred tax liability)
Assume that the parent company acquires its subsidiary by exchanging 118,000 shares of its $1 par value Common Stock, with a market value on the acquisition date of $30 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 PPE assets that are undervalued by $1 million, an unrecorded Customer List that the parent values at $200,000, and an unrecorded Brand Name asset valued at $500,000. And, finally, assume that the tax basis of the PPE assets is equal to their book values, and your tax rate is 35%.

b. Given the following acquisition-date balance sheets for the parent and its subsidiary, prepare the consolidation spreadsheet.

				Elimination Entries
Balance Sheet	Parent	Subsidiary		Dr	Cr		Consolidated
Assets
Cash	$783,300	$104,000					$Answer
Accounts receivable	384,000	696,000					Answer
Inventory	582,000	894,000					Answer
Equity investment	3,540,000				Answer	[E]	Answer
					Answer	[A]
Property, plant and equipment (PPE), net	14,899,600	1,654,000	[A]	Answer			Answer
Customer list			[A]	Answer			Answer
Brand name			[A]	Answer			Answer
Goodwill			[A]	Answer			Answer
	$20,188,900	$3,348,000					$Answer
Liabilities and stockholders' equity
Accounts payable	$188,100	$127,000					$Answer
Accrued liabilities	220,800	221,000					Answer
Long-term liabilities	2,000,000	1,000,000			Answer	[A]	Answer
Common stock	680,000	200,000	[E]	Answer			Answer
APIC	5,200,000	250,000	[E]	Answer			Answer
Retained earnings	11,900,000	1,550,000	[E]	Answer			Answer
	$20,188,900	$3,348,000		Answer	Answer		$Answer

Would like to know how to calculate the retained earnings and goodwill portions of this problem. The rest I have already answered.

A previous response to this question gave 10000 as the answer for goodwill and this is not correct according to the homework checker.

Answer 1

Answer:

The consolidation spreadsheet is prepared as below:
Elimination Entries
Balance Sheet	Parent	Subsidiary		Dr	Cr		Consolidated
Assets
Cash	7,83,300	1,04,000					8,87,300
Accounts receivable	3,84,000	6,96,000					10,80,000
Inventory	5,82,000	8,94,000					14,76,000
Equity Investment	35,40,000				20,00,000	[E]
					15,40,000	[A]
Property, Plant and Equipment (PPE), net	1,48,99,600	16,54,000	[A]	10,00,000			1,75,53,600
Customer List			[A]	2,00,000			2,00,000
Brand Name			[A]	5,00,000			5,00,000
Goodwill			[A]**	4,35,000			4,35,000
	2,01,88,900	33,48,000					2,21,31,900
Liabilities
Accounts Payable	1,88,100	1,27,000					3,15,100
Accrued Liabilities	2,20,800	2,21,000					4,41,800
Long-Term Liabilities	20,00,000	10,00,000			5,95,000	[A]*	35,95,000
Common Stock	6,80,000	2,00,000	[E]	2,00,000			6,80,000
APIC	52,00,000	2,50,000	[E]	2,50,000			52,00,000
Retained Earnings	1,19,00,000	15,50,000	[E]	15,50,000			1,19,00,000
	2,01,88,900	33,48,000		41,35,000	41,35,000		2,21,31,900
*Long-Term Liabilities=Deferred Income Tax Liability=(10,00,000+200,000+500,000)*35%
=$5,95,000
**Goodwill=15,40,000+5,95,000-10,00,000-200,000-500,00= $4,35,000