Question

Branson paid $576,200 cash for all of the outstanding common stock of Wolfpack, Inc., on January 1, 2017. On that date, the subsidiary had a book value of $374,000 (common stock of $200,000 and retained earnings of $174,000), although various unrecorded royalty agreements (10-year remaining life) were assessed at a $192,000 fair value. Any remaining excess fair value was considered goodwill.

In negotiating the acquisition price, Branson also promised to pay Wolfpack’s former owners an additional $74,000 if Wolfpack’s income exceeded $150,000 total over the first two years after the acquisition. At the acquisition date, Branson estimated the probability-adjusted present value of this contingent consideration at $51,800. On December 31, 2017, based on Wolfpack’s earnings to date, Branson increased the value of the contingency to $59,200.

During the subsequent two years, Wolfpack reported the following amounts for income and dividends:

	Net Income			Dividends Declared
2017	$	78,000		$	15,000
2018		88,000			25,000

In keeping with the original acquisition agreement, on December 31, 2018, Branson paid the additional $74,000 performance fee to Wolfpack’s previous owners.

Prepare each of the following:

1. Branson’s entry to record the acquisition of the shares of its Wolfpack subsidiary.

2. Branson’s entries at the end of 2017 and 2018 to adjust its contingent performance obligation for changes in fair value and the December 31, 2018, payment.

3. Prepare consolidation worksheet entries as of December 31, 2018, assuming that Branson has applied the equity method.

4. Prepare consolidation worksheet entries as of December 31, 2018, assuming that Branson has applied the initial value method.

Answer 1

$ 628,000 Investment in wolfpack inc. Contingent performance obligation Cash $ $ 51,800 576,200 7,400 31-12-17 Loss from increase in contingent performance obligation Contingent performance obligation (59200-51800) I$ | $ 7,400 I$ 14,800 31-12-18 Loss from increase in contingent performance obligation Contingent performance obligation |(74000-59200) $ 14,800 s 2000 31-12-18|Contingent performance obligation Cash $ 74,000 c. Equity method Common stock-wolfpack Retained earnings-wolfpack(174000+78000-15000) Investment in wolfpack $ $ 200,000 237,000 $ 437,000 Royalty agreements(192000-19200) Goodwill Investment in wolfpack $ $ | 172,800 62,000 $ 234,800 $ 68.800 Equity earnings of wolfpack(88000-19200) Investment in wolfpack $ 68.800 $ 25,000 Investment in wolfpack Dividends paid $ 25,000 $ 19,200 Amortization expense Royalty agreements $ 19,200 d. Initial value method $ 43,800 Investment in wolfpack(78000-15000-19200) Retained earnings-branson $ 43.800 Common stock-wolfpack Retained earnings-wolfpack Investment in wolfpack $ $ 200,000 237,000 $ 437,000 Royalty agreements(192000-19200) Goodwill Investment in wolfpack $ $ 172,800 62,000 $ 234,800 $ 25,000 Dividend income Dividends paid $ 25,000 $ 19,200 Amortization expense Royalty agreements $ 19,200 Note: Investment in wolfpack inc. Less:book value Fair value in excess Less:royalty Goodwill $ $ $ $ $ 628,000 (374,000) 254,000 (192,000) 62,000 Royalty amortization 192000/10years $ 19,200