Question

Chapman Company obtains 100 percent of Abernethy Company’s stock on January 1, 2017. As of that date, Abernethy has the following trial balance: Debit Credit Accounts payable $ 52,400 Accounts receivable $ 48,600 Additional paid-in capital 50,000 Buildings (net) (4-year remaining life) 179,000 Cash and short-term investments 61,250 Common stock 250,000 Equipment (net) (5-year remaining life) 260,000 Inventory 121,500 Land 105,000 Long-term liabilities (mature 12/31/20) 174,500 Retained earnings, 1/1/17 264,650 Supplies 16,200 Totals $ 791,550 $ 791,550 During 2017, Abernethy reported net income of $86,000 while declaring and paying dividends of $11,000. During 2018, Abernethy reported net income of $124,500 while declaring and paying dividends of $47,000. Assume that Chapman Company acquired Abernethy’s common stock for $675,160 in cash. Assume that the equipment and long-term liabilities had fair values of $284,350 and $142,140, respectively, on the acquisition date. Chapman uses the initial value method to account for its investment. Prepare consolidation worksheet entries for December 31, 2017, and December 31, 2018. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) rev: 09_18_2018_QC_CS-138777

Answer 1

First we need to calculate the value assets taken over is overvalued or undervalued Book Value As on Fair Value as on Difference Assets 1/1/2017 1/1/2017 (B) (B)-(A) Equipment 260,000 284,350 Long-term Liabilities (174,500) (142,140) (A) 24,350 32,360 Amount in $ 675,160 Calculation of Goodwill if any in acquisition Description Purchase price Less: Book Value Common Stock Additional paid in capital Retained Earnings 1/1/17 Total Book Value of Abernethy Excess of Fair value Over Book value Allocation of Excess Fair value over book value: Building Long-term Liabilities 250,000 50,000 264,650 564,650 110,510 24,350 32,360 56,710 53,800 Goodwill (110,510 - 56,710)

Calculation of Depreciation expenses on Excess Value allocated to specified assets and Unamortized excess value Annual Excess Value as on 01/01/17 Life Amortization Assets (A) (B) (C= A/B) Equipment 24,350 4,870 Long-term Liabilities 32,360 8,090 Goodwill 53,800 Total 110,510 12,960 Value as on 01/01/18 (A-C) 19,480 24,270 53,800 97,550 Calculation of retained earnings at the end of the year 12/31/2017 Description Amount Retained Earnings 1/1/17 Add: Net Income during the year 2017 Less: Dividends Paid 2017 Retained Earnings 12/31/17 264,650 86,000 (11,000) 339,650 Conversion from Initial Value method to Equity Method (Entry *C) Net Income during the year 2017 Less: Dividend 2017 Less: Amortization Conversion from Initial value to Equity Method 86,000 (11,000) (12,960) 62,040

No Transaction Accounts Debit Credit Date Year 2017 December 31,2017 1 Common stock Additional Paid in capital Retained Earnings -1/1/17 Investment in Abernethy (Elimination Entries of Equity investment from the book value acquired) 250,000 50,000 264,650 564,650 A December 31,2017 Equipment Long-term Liabilities Goodwill Investment in Abernethy (to record excess value assets acquired in acquisition) 24,350 32,360 53,800 110,510 I December 31, 2017 11,000 Dividend Income Dividend Paid (Elimination of Inter company dividend) 11,000 E 4,870 8,090 December 31, 2017 Depreciation Expenses Interest Expense Equipment Long-term Liabilities (Recording depreciation expense during the year) 4,870 8,090

62,040 Year 2018 December 31, 2018 Investment in Abernetty Retained Earnings - 01/01/18 (to record convert parent company figures to equity method) 62,040 December 31, 2018 Common stock Additional Paid in capital Retained Earnings -1/1/18 Investment in Abernethy (Elimination Entries of Equity investment from the book value acquired) 250,000 50,000 339,650 639,650 December 31, 2018 Equipment Long-term Liabilities Goodwill Investment in Abernethy (to record unamortized value of assets acquired as on 01/01/18) 19,480 24,270 53,800 97,550 47,000 December 31, 2018 Dividend Income Dividend Paid (Elimination of Inter company dividend) 47,000 4,870 8,090 December 31, 2018 Depreciation Expenses Interest Expense Equipment Long-term Liabilities ( Recording depreciation expense during the year) 4,870 8,090