Question

Prince Corporation acquired 100 percent of Sword Company on January 1, 20X7, for $195,000. The trial balances for the two companies on December 31, 20X7, included the following amounts:

	Prince Corporation									Sword Company
Item	Debit				Credit					Debit				Credit
Cash		$	83,000								$	31,000
Accounts Receivable			67,000									72,000
Inventory			177,000									104,000
Land			81,000									26,000
Buildings and Equipment			491,000									159,000
Investment in Sword Company			255,000
Cost of Goods Sold			491,000									253,000
Depreciation Expense			21,000									11,000
Other Expenses			66,000									66,000
Dividends Declared			52,000									26,000
Accumulated Depreciation						$	143,000								$	55,000
Accounts Payable							64,000									30,000
Mortgages Payable							185,000									108,000
Common Stock							287,000									45,000
Retained Earnings							324,000									91,000
Sales							695,000									419,000
Income from Sword Company							86,000
		$	1,784,000			$	1,784,000				$	748,000			$	748,000

Additional Information

1. On January 1, 20X7, Sword reported net assets with a book value of $136,000. A total of $26,000 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 $25,000 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

Part A

No.	Event	General journal	Debit	Credit
A	1	Investment in Sword Company	195000
		Cash		195000
B	2	Investment in Sword Company (419000-253000-11000-66000)	89000
		Income from Sword Company		89000
C	3	Cash	26000
		Investment in Sword Company		26000
D	4	Income from Sword Company (195000-136000-26000)/11	3000
		Investment in Sword Company		3000

Part B

No.	Event	General journal	Debit	Credit
A	1	Common stock	45000
		Retained earnings	91000
		Income from Sword Company	89000
		Dividends declared		26000
		Investment in Sword Company (balancing figure)		199000
		(To record basic consolidation entry)
B	2	Depreciation expense	3000
		Income from Sword Company		3000
		(To record amortized excess value reclassification entry)
C	3	Buildings and equipment	33000
		Goodwill	26000
		Accumulated depreciation		3000
		Investment in Sword Company (balancing figure)		56000
		(To record the excess value (differential) reclassification entry)
D	4	Accounts payable	25000
		Accounts receivable		25000
		(To record entry to eliminate the intercompany accounts)
E	5	Accumulated depreciation (55000-(4*3000))	43000
		Buildings and equipment		43000
		(To record the optional accumulated depreciation consolidation entry)

Fair value = 195000

Book value = 136000

Excess value = 59000

Assigned to goodwill = 26000

Excess assigned to building and equipment = 59000-26000 = 33000

Amortization of excess assigned to building and equipment = 33000/11 = $3000

PRINCE CORPORATION AND SUBSIDIARY Consolidated Financial Statements Worksheet December 31, 20X7
			Consolidation Entries
	Prince Corp.	Sword Co.	Dr.	Cr.	Consolidated
Income statement
Sales	695000	419000			1114000
Less: COGS	(491000)	(253000)			-744000
Less: depreciation expense	(21000)	(11000)	3000		-35000
Less: other expenses	(66000)	(66000)			-132000
Income from Sword Co.	86000		89000	3000	0
Net income	203000	89000	92000	3000	203000
Statement of retained earnings
Beginning balance	324000	91000	91000		324000
Net income	203000	89000	92000	3000	203000
Less: dividends declared	(52000)	(26000)		26000	(52000)
Ending balance	475000	154000	183000	29000	475000
Balance sheet
Assets
Cash	83000	31000			114000
Accounts receivable	67000	72000		25000	114000
Inventory	177000	104000			281000
Land	81000	26000			107000
Buildings & equipment	491000	159000	33000	43000	640000
Less: Accumulated depreciation	-143000	-55000	43000	3000	-158000
Investment in Sword Co.	255000			255000	0
Goodwill			26000		26000
Total Assets	1011000	337000	102000	326000	1124000
Liabilities & Equity
Accounts payable	64000	30000	25000		69000
Mortgages payable	185000	108000			293000
Common stock	287000	45000	45000		287000
Retained earnings	475000	154000	183000	29000	475000
Total Liabilities & Equity	1011000	337000	253000	29000	1124000

‘

Investment in Sword Co. = 195000+89000-26000-3000 = 255000