Question

2.   On January 1, 2013, Paver Company purchased 100% of Shovel Company for $ 150,000. At the time, Shovel Company's Common Stock totaled $100,000, and Retained Earnings was $50,000. Paver incurred $5,000 in indirect expenses related to the acquisition.

A.  Prepare the journal entries on Paver's books to record the investment in Shovel.

B.   Prepare the elimination entry that would be required on the workpaper in order to prepare a consolidated balance sheet.

C.   If Shovel’s Common Stock at acquisition was the same, but Retained Earnings at acquisition was $30,000, what would the elimination entry be?

Answer 1

A.Prepare the journal entries on Paver's books to record the investment in Shovel.

Date	Name of the account	Debit	credit
Jan 1,2013	Investment in Shovel CompanyA/c	$155,000
	To Bank A/c		$155,000
	(Being 100% of Shovel Corporation Purchased and indirect expenses incurred $5,000)

B.Prepare the elimination entry that would be required on the workpaper in order to prepare a consolidated balance sheet.

Date	Name of the account	Debit	credit
Dec 31,2013	Common Stock A/c	$100,000
	Retained Earnings A/c	$50,000
	Investment in Shovel CompanyA/c		$150,000
	(Elimination of Investment and Equity)

C. If Shovel’s Common Stock at acquisition was the same, but Retained Earnings at acquisition was $30,000, what would the elimination entry be?

Date	Name of the account	Debit	credit
Dec 31,2013	Common Stock A/c	$100,000
	Retained Earnings A/c	$30,000
	Good Will A/c	$20,000
	Investment in Shovel CompanyA/c		$150,000
	(Elimination of Investment and Equity)

The difference between the Cost of investment and the net worth of the subsidiary company shall be transferred to Good Will/(Capital Reserve). In Case of Excess cost of investment over net worth then the difference will be transferred to Good Will Account. Therefore, the excess cost of investment over net worth i.e., ($150,000 - $100,000-$30,000 = $20,000) will be transferred to good Will Account.