Question

Consolidation at date of acquisition (purchase price greater than book value, acquisition journal entries, deferred tax liability) Assume that the parent company acquires i exchanging 96,000 shares of its $5 par value Common Stock, with a fair value on the acquisition date of 542 per share, for all of the outstanding voting shares of the investee. In its analysls of the Investee company, the falr value of each of the subsldlary's assets and llablltiles equals their respective book values except for property, plant and equipment (PPE) assets that are undervalued by $760,000, an unrecorded Customer List with a fair value of $250,000, and an unrecorded Brand Name asset valued at $570,000.Ally, assume that the tax hases of the subsidiary's pre-acquisition identifiable net assets equal their book values. The parent company's effective tax rate is 36%. a. Prepare the journal entry that the parent makes to record the acquisition. its subsidiary in a "n General Journal Credit Equity investment # Common stock # APIC 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 93990 S149 PE0 460,900 002,240 1,200,000 1,287350 5 1,089,720 1463,040 2,487,380 Equity investment 4,032,000 x IA Property, plarit and equipment (PPCI, net 13,569,000 2,321,750 A 16,709,76 Customer list A] 250,000 250,000 Brand narme [AJ 570,000 70,000 Goodwill $20,200,760 $4,921,120 Tabilities and stockholders' equity Accounts peyable $225,720 S182,880 5 408,600 Accrued llabllme 264,960 318,240 593,200 Larg-terrn lidbilitie 2,400,000 1440,000 3,840,000 Deferred income tax [A] Common stock 816,000 288,000旧 288,000 APIC 6,240,000 360,000 [E] 350,000 Recained eamings 10.254,080 2,232,000禸 2,222,000 $20,200,760 $4,321,120 Check

Answer 1

Answer:-

a. Preparation of journal entry to record the acquisition -

General Journal
Description	Debit	Credit
Equity Investment	$4,032,000
Common Stock		$ 480,000
APIC		$3,552,000

Working Notes :

1.Equity investment =

96,000 shares × $42 per share = $ 4,032,000

2.Common stock =

96,000 shares × $ 5 per share = $ 480,000

3. APIC = 96,000 shares × ( 42 - 5) = $ 3,552,000

b. Preparation of the consolidation spreadsheet:

Balance Sheet	Parent	Subsidiary	Elimination Entries				Consolidated Balances
				Dr.	Cr.
ASSETS
Cash	939,960	149,760					$ 1,089,720
Accounts receivable	460,800	1,002,240					1,463,040
Inventory	1,200,000	1,287,360					2,487,360
Equity Investment	4,032,000	-			2,880,000	[E]	0
					1,152,000	[A]
Property, Plant and Equipment (PPE), net	13,568,000	2,381,760	[A]	760,000			16,709,760
Customer List	-	-	[A]	250,000			250,000
Brand Name	-	-	[A]	570,000			570,000
Goodwill	-	-	[A]	140,800			140,800
	$20,200,760	$4,821,120					$22,710,680
LIABILITIES AND SHAREHOLDERS EQUITY
Accounts Payable	$ 225,720	$ 182,880					$ 408,600
Accrued Liabilities	264,960	318,240					583,200
Long-Term Liabilities	2,400,000	1,440,000					3,840,000
Deferred Income Tax Liability	-	-			568,800	[A]	568,800
Common Stock	816,000	288,000	[E]	288,000			816,000
APIC	6,240,000	360,000	[E]	360,000			6,240,000
Retained Earnings	10,254,080	2,232,000	[E]	2,232,000			10,254,080
	$20,200,760	$4,821,120		$4,600,800	$4,600,800		$22,710,680