Question

1. Alpha, Inc, acquires 6o'percent of Beta for $414,000 cash on January 1, 2014. The remaining 40 percent of Beta traded near a total value of $276,000 both before and after the acquisition date. On January 1, 2014 Beta had the following assets and liabilities Book value Fair value Current assets Land Buildings(net) (six year remaining life Equipment (net) (4 year remaining life) 150,000 200,000 300,000 300,000 280,000-auou 150,000 200,000 360,000 Liabilities -100,000 00,000 The financial statements for the year ending, December 31, 2014 Alpha -600,000 300.000 410,000 210,000 Beta Revenuc OperatinB expense Investment income 51,000 Net income :241000 90,000 70,000 90,000 Retained earnings 700,000 -241,000 Net Income Dividends declared Retained earnings 92,000 -849 000 90.000 330,000 295,000 220,000 700,000 250,000 400,000 423,000 70,000 Current assets Land Buildings(net) (six year remaining life) Equipment (net) (4 year remaining life) 200,000 225,000 Investment Beta 2.073,000 970,000 -480,000 2,073.000 970,000 Total assets liabilities Common stock Retained earnings -500,000 400,000 -724,000 -849,000 90,000 Total liabilities & equity Do the following: 1. Prepare an allocation of acquisition cost 2. Prepare the entries to record the investees 2014 transactions on the investors books using the Equity Method 3. Prepare the consolidation entries for the worksheet complete with analysis.

Answer 1

1. The allocation shall be made at the fair value and not book values of Net Assets (Total assets - Total Outside liabilities)

Calculation of Net Assets of Beta Ltd.

Particulars	Amount ($)
Current Assets	150,000
Land	200,000
Building	360,000
Equipment	280,000
Total Assets (A)	990,000
Liabilities (B)	400,000
Net Assets (A) - (B)	590,000

Of $590,000, only 60% is acquired by Alpha Inc. Hence the value of assets acquired by Alpha Inc is $ 354,000

2. Alpha Inc has paid $ 414,000 to acquire assets worth $354,000. Hence, under equity method investment value is only $354,000. The balance $ 60,000 shall be taken to goodwill a/c. The Journal entry will be

Date	Particulras	Dr. Amount($)	Cr. Amount($)
01-Jan-2014	Investment in Beta A/c Dr.	354,000
	Goodwill A/c Dr.	60,000
	To Cash A/c		414,000
	(Being investment made in Beta)

3. Beta Inc has declared a dividend of $ 70,000 for the year ended 31-Dec-2014. Alpha Inc will receive 60% of this amount i.e. $ 42,000 which will go to reduce the investment A/c. The following entry will be made

Beta has a net Income of $ 90,000 for the year ended 31-Dec-2014 Hence, 60% of the same i.e. $ 54,000 shall be incorporated in books of Alpha Inc.

Hence, after passing the entries the balance in Investment in Beta A/c is $ 366,000