Question

Branson paid $607,500 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 $373,000 (common stock of $200,000 and retained earnings of $173,000), although various unrecorded royalty agreements (10-year remaining life) were assessed at a $199,000 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 $45,000 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 $31,500. On December 31, 2017, based on Wolfpack’s earnings to date, Branson increased the value of the contingency to $36,000.

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

	Net Income			Dividends Declared
2017	$	80,500		$	25,000
2018		90,500			35,000

In keeping with the original acquisition agreement, on December 31, 2018, Branson paid the additional $45,000 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

SOLUTION:

PART-A)
Particulars	Debit	Credit
Investment on Wolfpack	639,000
Contingent performance obligation		31,500
Cash		607,500
PART-B)
Particulars	Debit	Credit
Loss from increase in contingent performance obligation	4,500
Contingent performance obligation		4,500
Loss from increase in contingent performance obligation	9,000
Contingent performance obligation		9,000
Contingent performance obligation	45,000
Cash		45,000
PART-C)
Particulars	Debit	Credit
Common stock-Wolfpack	200,000
Retained earnings - Wolfpack	228,500
Investment in Wolfpack		428,500
Royalty agreements	179,100
Goodwill	67,000
Investment in Wolfpack		246,100
Equity earnings in Wolfpack	70,600
Investment in Wolfpack		70,600
Investment in Wolfpack	35,000
Dividends declared		35,000
Amortization expense	19,900
Royalty agreements		19,900
PART-D)
Particulars	Debit	Credit
Investment in Wolfpack	35,600
Retained earnings - Branson		35,600
Common stock	200,000
Retained earnings - Wolfpack	228,500
Investment in Wolfpack		428,500
Royalty agreements	179,100
Goodwill	67,000
Investment in Wolfpack		246,100
Dividends income	35,000
Dividends declared		35,000
Amortization expense	19,900
Royalty agreements		19,900