Question

y 2. Consolidation - Cost Method 40 points On January 2, 2015, Madison, Inc. acquired Alton Enterprises as a wholly-owie $1,224,000 in a taxable transaction. The purchase price was $700,000 in of Alton's net assets. Part of the excess was attribute undervalued by $450,000. The rest was goodwill. The parent u V,000. The rest was goodwill The parent uses the cost method of pre von Equity investment bookkeepina Neither company has issued any shares of stock during this time period. The 2017 financial statements for the two companies are presen ton Enterprises as a wholly-owned subsidiary, paying ase price was $700,000 in excess of the book value art of the excess was attributable to a building with a 10-year te nts for the two companies are presented below. Sales revenue Cost of goods sold Gross profit Operating expenses Dividend income Net Income Madison, Inc. $2,140,000 (1.430,000) 710,000 (274,000) 22.700 $_458.700 Alton Enterprises $ 860,000 (520.000) 340,000 (204,000) Retained Earnings, 1/1/17 Net income Dividends Retained Earnings, 12/31/17 $ 136.000 $ 475,500 136,000 (22.700) $588.800 $2,289,000 458,700 (42.000) $2.705,700 $ 591,500 643,500 1,224,000 3.422.300 $5.881.300 $ Cash and receivables Inventory Equity investment Property, plant & equipment (Net) Total Assets 390,700 312,500 502.300 $1.205.500 Accounts payable Accrued liabilities Notes payable Common stock Additional paid-in capital Retained Earnings, 12/31/17 Total Liabilities and Equities $ 402,000 427,300 360,000 405,000 1,581,300 2.705.700 $5.881.300 $ 85,000 105,200 270,000 70,000 86,500 588.800 $1,205,500 a. What was Alton's Retained Earnings at the date of acquisition? b. Prepare the consolidating entries for 2017. C. At what amount will the following accounts appear on the consolidated financial statements for 2017? Cost of Goods Sold Dividend Income Operating Expenses Cash and Receivables Equity Investment Property. Plant and Equipment (net of accumulated depreciation) Goodwill Common Stock Retained Earnings

Answer 1

Question a. What was Alton's Retained Earning at the date of acquisition?

Ans. Altons was acquired on Jan, 2, 2015. Hence we need to calculate the said figure on that date.'

Out of Total Consideration of $ 1224000, the purchase price was in excess of $700000, ie we paid towards Common Stock & Retained Earning $ 524000. As no further common stock has been issued, & the common stock amount is $ 70000, the rest amount remains for Retained Earnings on that date, hence 524000-70000= Retained earning on that date was $454000.

Question: b. Prepare the Consolidating Entries for 2017.

Ans. Assets A/C....................................................Dr. 1205500

Goodwill A/C.................................................Dr. 250000

Property (Revalued......................................Dr...315000

( 450000- 3 yrs dep. 135000)

   To All Liabilities.......................................................546700

(Except Common Stock & Retained Earnings)

To Investment................................................... (1224000 -22700 dividend)=1201300

To Retained earning after acquisition....................22500

(Being consolidation done assuming the Property Will be taken at present valuation & difference being the Income earned after acqusition in 2015)

Question C. At what amount the following figures will be shown on the Consolidated Financial Statements?

Answer: 1. COST OF GOODS SOLD=1430000+520000= $1950000

2.DIVIDEND INCOME= ZERO due to consolidation effect. Amount of $22700 will be adjusted in Investment.

3.OPERATING EXPENSES=274000+204000=$478000

4.CASH & RECEIVABLES=591500+390700= $982200

5.EQUITY INVESTMENT=NIL due to consolidation effect.

6.PROPERTY , PLANT & EQUIPMENT (net of depreciation)=3422300+502300+ (450000 being the value paid for in 2015- 3 yrs depreciation 15,16,17 (10 yrs life)ie 45000*3 yrs= 135000= 315000)=4239600

7.GOODWILL=$250000 PURCHASE VALUE

8.COMMON STOCK=405000+70000=$475000

9. RETAINED EARNINGS=2705700+588800=$3294500 (After acquisition $22500 effect is included.)