Question

Consolidation at date of acquisition (purchase price greater than book value, acquisition journal entries, deferred tax liability)
Assume that the parent company acquires its subsidiary by exchanging 116,000 shares of its $1 par value Common Stock, with a market value on the acquisition date of $30 per share, for all of the outstanding voting shares of the investee. In its analysis of the investee company, the parent values all of the subsidiary's assets and liabilities at an amount equaling their book values except for PPE assets that are undervalued by $1 million, an unrecorded Customer List that the parent values at $200,000, and an unrecorded Brand Name asset valued at $500,000. In addition, the purchase and sale agreement provides for contingent consideration in the event that the subsidiary meets earnings targets. You feel that the fair value of that contingent consideration liability is $400,000 on the acquisition date. And, finally, assume that the tax basis of the PPE assets is equal to their book values, and your tax rate is 35%.

a. Prepare the journal entry that the parent makes to record the acquisition.

General Journal
Description	Debit	Credit
Equity investmentCustomer listBrand nameGoodwillContingent consideration liabilityCommon stockAPICRetained earnings
Equity investmentCustomer listBrand nameGoodwillContingent consideration liabilityCommon stockAPICRetained earnings
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		Consolidated
Assets
Cash	$783,300	$104,000
Accounts receivable	384,000	696,000
Inventory	582,000	894,000
Equity investment	3,480,000					[E]
						[A]
Property, plant and equipment (PPE), net	14,899,600	1,654,000	[A]
Customer list			[A]
Brand name			[A]
Equity investmentCustomer listBrand nameGoodwillContingent consideration liabilityCommon stockAPICRetained earnings			[A]
	$20,128,900	$3,348,000
Liabilities and stockholders' equity
Accounts payable	$188,100	$127,000
Accrued liabilities	220,800	221,000
Long-term liabilities	2,000,000	1,000,000				[A]
Common stock	680,000	200,000	[E]
APIC	5,200,000	250,000	[E]
Retained earnings	11,840,000	1,550,000	[E]
	$20,128,900	$3,348,000

Answer 1

	Answer to (a)
Date	Account Title & Explanation	Debit ($)	Credit ($)
	Equity Investment (116000 x $30)	3480000
	Common Stock (116000 x $1)		116000
	Paid in capital (116000 x $29)		3364000
	(Acquisition of shares)

Answer to (b)
Elimination Entries
Balance Sheet	Parent	Subsidiary		Dr	Cr		Consolidated
Assets
Cash	$783,300	$104,000					887300
Accounts receivable	384,000	696,000					1080000
Inventory	582,000	894,000					1476000
Equity investment	3,480,000				2000000	[E]
					1880000	[A]
Property, plant and equipment (PPE), net	14,899,600	1,654,000	[A]	1000000			17153600
Customer list			[A]	200000			200000
Brand name			[A]	500000			500000
Equity investmentCustomer listBrand nameGoodwillContingent consideration liabilityCommon stockAPICRetained earnings			[A]	180000			180000
	$20,128,900	$3,348,000					$21,476,900
Liabilities and stockholders' equity
Accounts payable	$188,100	$127,000					315100
Accrued liabilities	220,800	221,000					441800
Long-term liabilities	2,000,000	1,000,000					3000000
Deferred Tax liability					-595000	[A]	-595000
Common stock	680,000	200,000	[E]	200000			680000
APIC	5,200,000	250,000	[E]	250000			5200000
Retained earnings	11,840,000	1,550,000	[E]	2145000			12435000
	$20,128,900	$3,348,000		$2,595,000	($5,595,000)		$21,476,900
Notes:
1)Deferred Tax Liability = (1000000 + 200000 + 500000) x 35/100 = $595000.
2)Total Equity Investments = (116000 x $30) + $400000 = $3880000
Equity Investments = Total Equity investments - PPE - Customer List - Brand name - Goodwill
Equity Investment = 3880000 - 1000000 - 200000 - 500000 - 180000 = $2000000