Question

Consolidating entries (market value differs from book value) Assume that on January 1, 2013, an investor company acquired 100% of the outstanding voting common stock of an investee company. The following financial statement information was prepared immediately after the acquisition and presents the acquisition-date balance sheet for the pre-consolidation investor company, the investee company and the consolidated financial statements for the investor and investee. Investor Investee Consolidated Cash & receivables $1,500,000 $187,500 $1,687,500 Inventory 1,125,000 468,750 1,593,750 Property & equipment $4,312,500 $1,500,000 6,000,000 Investment in investee $1,312,500 Identifiable intangible 206,250 Goodwill 90,000 Total assets $8,250,000 $2,156,250 $9,577,500 Current liabilities $750,000 $375,000 $1,125,000 Accrued expenses 562,500 562,500 Bonds payable $937,500 952,500 Common stock 3,131,250 187,500 3,131,250 Additional paid-in capital 2,681,250 234,375 2,681,250 Retained earnings 1,125,000 421,875 1,125,000 Total liabilities and equity $8,250,000 $2,156,250 $9,577,500 In preparing the consolidated financial statements, what is the amount of the debit or credit made to the "investment in investee" account as part of the [A] consolidating entry? (Recall from the chapter that the [A] consolidating entry reclassifies the acquisition accounting premium from the investment account to the individual net assets that require adjustment from book value to fair value.) $90,000 $1,312,500 $483,750 $468,750

Answer 1

Option B is correct. Investment in investee will be credited by 1312500 and assets and liabilities of the investee will be merged with assets and liabilities of investor company . Any excess shall be treated as premium