Question

Prince Corporation acquired 100 percent of Sword Company on January 1, 20X7, for $191,000. The trial balances for the two companies on December 31, 20X7, included the following amounts: Sword Company Debit Credit $ 29,000 58,000 110,000 24,000 150,000 Item Cash Accounts Receivable Inventory Land Buildings and Equipment Investment in Sword Company Cost of Goods Sold Depreciation Expense Other Expenses Dividends Declared Accumulated Depreciation Accounts Payable Mortgages Payable Common Stock Retained Earnings Sales Income from Sword Company Prince Corporation Debit Credit $ 86,000 53,000 184,000 84,000 494,000 222,000 494,000 24,000 69,000 62,000 $ 150,000 59,000 189,000 293,000 338,000 687,000 56,000 $1,772,000 $1,772,000 259,000 14,000 69,000 25,000 $ 70,000 26,000 108,000 48,000 85,000 401,000 $738,000 $738,000 Additional Information 1. On January 1, 20X7, Sword reported net assets with a book value of $133,000. A total of $25,000 of the acquisition price is applied to goodwill, which was not impaired in 20X7. 2. Sword's depreciable assets had an estimated economic life of 11 years on the date of combination. The difference between fair value and book value of tangible assets is related entirely to buildings and equipment. 3. Prince used the equity-method in accounting for its investment in Sword. 4. Detailed analysis of receivables and payables showed that Sword owed Prince $21,000 on December 31, 20X7.

1.

A. Record the initial investment in Sword Co.

B. Record Prince Corp's share of Sword Co.'s 20X7 income.

C. Record Prince Corp's share of Sword Co.'s 20X7 dividend.

D. Record the amortization of the excess acquisition price.

2.

A. Record the basic consolidation entry.

B. Record the amortized excess value reclassification entry.

C. Record the excess value (differential) reclassification entry.

D. Record the entry to eliminate the intercompany accounts.

E. Record the optional accumulated depreciation consolidation entry.

Answer 1

PRINCE CORPORATION
Journal Entries for the year 2017
A.
Account Title and Explanation	Debit	Credit
Investment in Subsidiary - Sword Co.	$222,000
Cash		$222,000
(to record the initial investment in Sword Company)
Investment in Subsidiary - Sword Co.	$59,000
Income from Investments		$59,000
(to record the share of profits of Sword Co. in the books of Prince Corporation)
Dividend Receivable	$25,000
Investment in Subsidiary - Sword Co.		$25,000
(to record the dividend income received from Sword Co.)
Income from Investments	$5,818
Investment in Subsidiary - Sword Co.		$5,818
(to record the amortization of excess acquisition price which is related entirely
to building and equipment)
B.
Journal Entries for Consolidation of Accounts for the year 2017
Account Title and Explanation	Debit	Credit
Common Stock	$48,000
Retained Earnings	$85,000
Income from Sword Co.	$59,000
Dividend declared		$25,000
Investment in Subsidiary - Sword Co.		$167,000
(to record the basic consolidation entry of elimination of owner's equity of
Sword Co. and investments of Prince Corporation)
Depreciation Expense	$5,818
Income from Sword Co.		$5,818
(to record amortized excess value reclassification entry)
Goodwill	$25,000
Building and equipment	$64,000
Accumulated Depreciation		$5,818
Investment in Subsidiary - Sword Co.		$83,182
(to record the excess value (differential) reclassification)
Accounts Payable - Sword Co.	$21,000
Accounts Receivable - Prince Corporation		$21,000
(to eliminate the intercompany accounts)
Accumulated Depreciation	$5,818
Building and Equipment		$5,818
(to record the consolidation of accumulated depreciation to the asset which
was reclassified to represent it at the fair value as computed on the date of
acquisition)
Working Notes
Computation of differential value attributed to Building and Equipment
at the time of acquisition
Net Consideration paid		$222,000
Less:
Book Value of Net assets of Sword Co.	$133,000
Acquisition applied to Goodwill	$25,000	$158,000
Differential value attributed to Building		$64,000
Computation of amortization of excess acquisition price
Excess acquisition price attributed to Building		$64,000
Estimated economic life at the date of acquisition (in years)		11
Amortization cost( Excess Acquisition Price/Economic Life)		$5,818
Computation of Net Income of Sword Co.
Sales		$401,000
Less:Expenses
Cost of Goods Sold	$259,000
Other Expenses	$69,000
Depreciation Expense	$14,000	$342,000
Net Income		$59,000