Question

Prince Corporation acquired 100 percent of Sword Company on January 1, 20X7, for $192,000. The trial balances for the two companies on December 31, 20X7, included the following amounts:

Additional Information

1. On January 1, 20X7, Sword reported net assets with a book value of $129,000. A total of $30,000 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 $18,000 on December 31, 20X7.

Required:
a. Prepare all journal entries recorded by Prince with regard to its investment in Sword during 20X7. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
b. Prepare all consolidating entries needed to prepare a full set of consolidated financial statements for 20X7. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

c. Prepare a three-part consolidation worksheet as of December 31, 20X7. (Values in the first two columns (the "parent" and "subsidiary" balances) that are to be deducted should be indicated with a minus sign, while all values in the "Consolidation Entries" columns should be entered as positive values. For accounts where multiple adjusting entries are required, combine all debit entries into one amount and enter this amount in the debit column of the worksheet. Similarly, combine all credit entries into one amount and enter this amount in the credit column of the worksheet.)

Answer 1

a. At the time of investment in Sword, Prince will need to record only one journal entry related to it investment.

Investment in Sword Company (Dr) $192,000

Cash (Cr) $192,000

For the profit from Sword, Prince would have recorded below entry as per equity method

Investment in Sword Company (Dr) $86,000

Income from Sword Company (Cr) $86,000

Dividend from Sword, will be recorded like this in Prince's books

Cash (Dr) $30,000

Investment in Sword Company (Cr) $30,000

b.

Acquisition Price	192,000
Net book Value on acquisition	(129,000)
Goodwill	(30,000)
Fair value adjustment in Building and equipments	33,000

Consolidation journal entries will be like this

	Debit	Credit	Notes
Goodwill	30,000
Building and equipments	33,000
Investment in Sword Company		248,000	Elimination of investment in subsidiary
Income from Sword Company	86,000		Elimination of subsidiary income
Dividend Declared		30,000	Elimination of subsidiary dividend
Common Stock	45,000		Elimination of Subsidiary equity
Retained Earnings	84,000		Elimination of Subsidiary equity
Account Receivable		18,000	Elimination of inter-company receivable
Accounts Payable	18,000		Elimination of inter-company payable

Consolidation Worksheet

	Prince		Sword		Consolidation Adjustment		Consolidated Balance
Items	Debit	Credit	Debit	Credit	Debit	Credit	Debit	Credit
Cash	88,000		44,000				132,000
Accoutns Receivable	58,000		63,000			18,000	103,000
Inventory	171,000		112,000				283,000
Land	86,000		39,000				125,000
Building and Equipment	499,000		168,000		33,000		700,000
Investment in Sword Company	248,000		-			248,000	-
Cost of goods sold	499,000		257,000				756,000
Depreciation	23,000		13,000				36,000
Other expense	58,000		58,000				116,000
Dividends declared	67,000		30,000			30,000	67,000
Accoumulated Depreciation		143,000		65,000				208,000
Accounts Payable		55,000		23,000	18,000			60,000
Mortgage payable		185,000		150,000				335,000
Common stock		286,000		45,000	45,000			286,000
Retained earnings		354,000		84,000	84,000			354,000
Sales		688,000		417,000				1,105,000
Income from Sword Company		86,000		-	86,000		-	-
Goodwill					30,000		30,000
Total	1,797,000	1,797,000	784,000	784,000	296,000	296,000	2,348,000	2,348,000

Answer 2

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