Question

On January 1, 2020, Canyon Creek Company acquired Smoltz Corporation by issuing 50,000 shares of its $1 par common stock with a market value of $12 per share. A building on Smoltz’s books was undervalued by $50,000, resulting in annual amortization of $5,000. Also, there was an unrecorded patent valued at $80,000, resulting in annual amortization of $8,000. The separate 2020 financial statements for Canyon Creek and Smuckerman are presented below.

	Canyon Creek Co.	Smuckerman Corp.
Sales revenue	$850,000	$380,000
Cost of goods sold	-505,000	-234,000
Gross profit	345,000	146,000
Operating expenses	-300,600	-26,500
Equity income	106,500	_
Net Income	$150,900	$119,500
Retained Earnings, 1/1/20	$800,000	$305,600
Net income	150,900	119,500
Dividends	-45,000	-25,000
Retained Earnings, 12/31/20	$905,900	$400,100
Cash and receivables	$250,000	$158,000
Inventory	350,000	42,600
Equity investment	681,500
Property, plant & equipment (Net)	1,165,100	474,100
Total Assets	$2,446,600	$674,700
Accounts payable	$426,000	$45,000
Accrued liabilities	54,700	28,000
Notes payable	0	125,000
Common stock	75,000	46,600
Additional paid-in capital	985,000	30,000
Retained Earnings, 12/31/20	905,900	400,100
Total Liabilities and Equities	$2,446,600	$674,700

Required:

a. Prepare the journal entry to record the investment in the subsidiary.

b. Show the computation of Equity Income for 2020.

c. Show the computation of Equity Investment at December 31, 2020.

d. Prepare all necessary consolidation entries for a 2020 worksheet.

Answer 1

$ 600,000 Acquisition Analysis Acquisiton price paid (50,000 shares * $ 12) Less: Book value of Subisidiary Common stock Additional paid in capital Retained earnings 01/01/20 Fair value in excess of Book value Allocation of Excess fair value Building Patent Goodwill (217,800 - 50,000 - 80,000) 46,600 30,000 305,600 382,200 217,800 $ 50,000 80,000 87,800 Credit a) Journal entry to record investment Account titles and Explanation Equity Investment Common stock (50,000 $ 1) Additional paid - in capital Debit 600,000 50,000 550,000 $ b) Equity Income Net Income of Smuckerman Less: Depreciation on Undervalued Building Less: Amortization on unrecorded Patent Equity Income 119,500 (5,000) (8,000) 106,500 $ c) Equity Investment Acquisition price Add: Equity Income Less: Dividends declared by Smuckerman Equity Investment 600,000 106,500 (25,000) 681,500

Debit Credit (S) d) Consolidation Entries Event Account titles and Explanation Common stock Additional paid in capital Retained earnings -1/1/20 Equity Investment (to eliminate the subsidiary stockholding equity) 46,600 30,000 305,600 382,200 (A) Property, Plant & Equipment Patent Goodwill Equity Investment (to record undervalued assets of Smuckerman) 50,000 80,000 87,800 217,800 (1) 106,500 Equity Income Equity Investment (to eliminate the equity income) 106,500 (D) 25,000 Equity Investment Dividends (to eliminate the intercompany dividend) 25,000 (E) 13,000 Operating expenses Property, plant and equipment Patent (to record amortization expenses) 5,000 8,000