Question

hapman Company obtains 100 percent of Abernethy Company’s stock on January 1, 2017. As of that date, Abernethy has the following trial balance: Debit Credit Accounts payable $ 52,800 Accounts receivable $ 49,500 Additional paid-in capital 50,000 Buildings (net) (4-year remaining life) 174,000 Cash and short-term investments 84,000 Common stock 250,000 Equipment (net) (5-year remaining life) 315,000 Inventory 137,500 Land 90,500 Long-term liabilities (mature 12/31/20) 188,500 Retained earnings, 1/1/17 323,600 Supplies 14,400 Totals $ 864,900 $ 864,900 During 2017, Abernethy reported net income of $129,000 while declaring and paying dividends of $16,000. During 2018, Abernethy reported net income of $176,000 while declaring and paying dividends of $38,000. Assume that Chapman Company acquired Abernethy’s common stock for $733,100 in cash. As of January 1, 2017, Abernethy’s land had a fair value of $101,000, its buildings were valued at $242,000, and its equipment was appraised at $279,500. Chapman uses the equity method for this investment. Prepare consolidation worksheet entries for December 31, 2017, and December 31, 2018. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) rev: 10_16_2018_QC_CS-143715

Answer 1

First we need to calculate the value assets taken over is overvalued or undervalued Book Value As on Fair Value as on Assets 1/1/2017 1/1/2017 (B) Land 90,500 101,000 Building 174,000 242,000 Equipment 315,000 279,500 (A) Overvalued or (Undervalued) (B)-(A) 10,500 68,000 (35,500) Calculation of Goodwill if any in acquisition Amount in $ 733,100 250,000 50,000 323,600 Description Purchase price Less: Book Value Common Stock Additional paid in capital Retained Earnings 1/1/17 Total Book Value of Abernethy Excess of Fair value Over Book value Allocation of Excess Fair value over book value: Land Building Equipment 623,600 109,500 10,500 68,000 (35,500) 43,000 66,500 Goodwill (109,500 - 43,000)

Calculation of Depreciation expenses on Excess Value allocated to specified assets Value as on 01/01/17 Life Assets (A) Land 10,500 Building 68,000 Equipment (35,500) Goodwill 66,500 Total 109,500 Depreciation per year Value as on (C= A/B) 01/01/18 (A-C) 10,500 17,000 51,000 (7,100) (28,400) 66,500 9,900 99,600

Calculation of retained earnings at the end of the year 12/31/2017 and 12/31/2018 Description Amount Retained Earnings 1/1/17 323,600 Add: Net Income during the year 2017 129,000 Less: Dividends Paid 2017 (16,000) Retained Earnings 12/31/17 436,600 Retained Earnings 1/1/18 Add: Net Income during the year Less: Dividends Paid Retained Earnings 12/31/18 436,600 176,000 (38,000) 574,600 Calculation of equity income in subsidiary Description Amount Year 2017 Income of Abernethy's during the year 2017 Less: Depreciation during the year Equity income in Abernethy's income for the year 2017 129,000 (9,900) 119,100 Year 2018 Income of Abernethy's during the year 2018 Less: Depreciation during the year Equity income in Abernethy's income for the year 2018 176,000 (9,900) 166,100

NO Debit Credit S Date Accounts Year 2017 December 31, 2017 Common stock Additional Paid in capital Retained Earnings -1/1/17 Investment in Abernethy (Elimination Entries of Equity investment from the book value acquired) 250,000 50,000 323,600 623,600 A 10,500 68,000 66,500 December 31,2017 Land Building Goodwill Equipment Investment in Abernethy (to record excess value assets acquired in acquisition) 35,500 109,500 119,100 December 31,2017 Equity Income in Abernethy Investment in Abernethy (Elimination of Equity income from equity Investment) 119,100 D 16,000 December 31, 2017 Investment in Abernethy Dividends Paid (Recording of dividend income from subsidiary) 16,000 E 9,900 7,100 December 31, 2017 Depreciation Expenses Equipment Buildings ( Recording depreciation expense during the year) 17,000

S Additional Daid in canital Year 2018 December 31, 2018 Common stock Additional Paid in capital Retained Earnings - 1/1/18 Investment in Abernethy (Elimination Entries of Equity investment from the book value acquired) 250,000 50,000 436,600 736,600 A December 31,2018 Land Building Goodwill 10,500 51,000 66,500 Equipment Investment in Abernethy (to record unamortized value of assets acquired as on 01/01/18) 28,400 99,600 1 166,100 December 31, 2018 Equity Income in Abernethy Investment in Abernethy (Elimination of Equity income from equity Investment) 166,100 D 38,000 December 31, 2018 Investment in Abernethy Dividends Paid (Recording of dividend income from subsidiary) 38,000 E 9,900 7,100 December 31, 2018 Depreciation Expenses Equipment Buildings (Recording depreciation expense during the year) 17,000 L