Question

Problem 3-34 (LO 3-3a, 3-3b, 3-7) Branson paid $585,200 cash for all of the outstanding common stock of Wolfpack, Inc., on January 1, 2017. On that date, the subsidiary had a book value of $375,000 (common stock of $200,000 and retained earnings of $175,000), although various unrecorded royalty agreements (10-year remaining life) were assessed at a $196,000 fair value. Any remaining excess fair value was considered goodwill. In negotiating the acquisition price, Branson also promised to pay Wolfpack's former owners an additional $54,000 if Wolfpack's income exceeded $150,000 total over the first two years after the acquisition. At the acquisition date, Branson estimated the probability-adjusted present value of this contingent consideration at $37.800. On December 31, 2017, based on Wolfpack's earnings to date, Branson increased the value of the contingency to $43,200. During the subsequent two years, Wolfpack reported the following amounts for income and dividends: 2017 2018 Net Income $ 77,500 87,500 Dividends Declared $ 15,000 25,000 In keeping with the original acquisition agreement, on December 31, 2018, Branson paid the additional $54,000 performance fee to Wolfpack's previous owners. Prepare each of the following: a. Branson's entry to record the acquisition of the shares of its Wolfpack subsidiary. b. Branson's entries at the end of 2017 and 2018 to adjust its contingent performance obligation for changes in fair value and the December 31, 2018, payment. C. Prepare consolidation worksheet entries as of December 31, 2018, assuming that Branson has applied the equity method. d. Prepare consolidation worksheet entries as of December 31, 2018, assuming that Branson has applied the initial value method.

Answer 1

	Account Titles and Explanation	Debit	Credit
a.	Investment in Wolfpack, Inc.	623,000
	Contingent performance obligation		37,800
	Cash		585,200
b.
12/31/17	Loss from increase in contingent performance obligation (43,200 - 37,800)	5,400
	Contingent performance obligation		5,400
12/31/17	Loss from increase in contingent performance obligation (54000 - 43,200)	10,800
	Contingent performance obligation		10,800
12/31/18	Contingent performance obligation	54,000
	Cash		54,000
c.  Equity Method
	Common stock- Wolfpack	200,000
	Retained earnings-Wolfpack (175000+ (77,500 - 15,000)	237,500
	Investment in Wolfpack		437,500
	Royalty agreements (196,000 - 19,600)	176,400
	Goodwill ( 623,000 - 375000 - 196000)	52,000
	Investment in Wolfpack		228,400
	Equity earnings of Wolfpack (87,500 - 19,600)	67,900
	Investment in Wolfpack		67,900
	Investment in Wolfpack	25,000
	Dividends paid		25,000
	Amortization expense (196,000/10)	19,600
	Royalty agreements		19,600
d.  Initial Value Method
	Investment in Wolfpack (77500-15000-19600)	42,900
	Retained earnings-Branson		42,900
	Common stock- Wolfpack	200,000
	Retained earnings-Wolfpack (175000+ (77,500 - 15,000)	237,500
	Investment in Wolfpack		437,500
	Royalty agreements (196,000 - 19,600)	176,400
	Goodwill ( 623,000 - 375000 - 196000)	52,000
	Investment in Wolfpack		228,400
	Dividend income	25,000
	Dividends paid		25,000
	Amortization expense	19,600
	Royalty agreements		19,600