Question

E4.5 Acquisition Cost, Equity Method, Eliminating Entries, Second Year Peak Entertainment LO 1, 2, 4 acquires all of the stock of Saddlestone Inc. on January 1, 2020. In preparing to consolidate the trial bal- ances of Peak and Saddlestone at December 31, 2021 (two years after the acquisition), you assemble the following information: Date-of-acquisition information: • Value of stock given up to acquire Saddlestone: $20,000,000. • Direct merger costs: $250,000. • Saddlestone's shareholders' equity: $7,200,000, consisting of capital stock, $2,000,000; retained earn- ings, $5,000,000; accumulated other comprehensive income, $200,000. • Fair value of earnings contingency agreement to be paid in cash: $300,000. • Fair value of previously unrecorded identifiable intangibles (5-year life): $2,000,000. There are no revaluations of Saddlestone's reported net assets. Information for 2020 and 2021: • Saddlestone's reported net income for 2020: $3,000,000; for 2021: $3,500,000. • Saddlestone's reported other comprehensive income for 2020: $100,000 net income; for 2021: $25.000 net loss. • Saddlestone declared and paid dividends of $1,000,000 each year. • Goodwill and identifiable intangibles are not impaired in 2020; goodwill is impaired by $200,000 in 2021. Required a. Prepare the 2020 and 2021 journal entries made by Peak to record its investment, using the complete equity method. b. Prepare the consolidation eliminating entries made at December 31, 2021. LO 1.2 anan Dalane Camnanu's wholly-

Answer 1

Solution ;

1. Peak's entries to record the acquision

                Journal entries

Particulars	Debit	Credit
Investment in Saddlestone	20300,000
Merger expense	250,000
To Capital stock		20,000,000
To Contigent consideration liability		300,000
To Cash		250,000
Peak's equity method entries for 2020
Reported netincome = Saddlestone reported netincome                                 + Other comprehensive income
= 3000,000 + 100,000 = 3100,000
Revaluation write - off
Ident . intangibles (1.2mil / 4yr)    = 2000,000 / 5 = 400,000
Equity in netincome = Reported netincome - Ident . intangibles
= 3100,000 - 400,000 = 2700,000
Journal entries
Particulars	Debit	Credit
Investment	2700,000
To Equity		2700,000
Cash- divident paid	1000,000
To Invest. divident		1000,000
Peak's equity method entries 2021
Reported net income = Saddlestone reported netincome                                 - Other comprehensive loss                                 = 3500,000 - 25000 = 3475000 Revaluation write off Ident . intangibles (2 mil / 5 yr) = 2000,000 / 5 = 400,000 Equity in net income = 3475000 - 400,000 = 3075000                        Journal entries
Particulars	Debit	Credit
Investment	3075000
To Equity		3075000
Cash	1000,000

    To Invest . divident                                                                                                   1000,000

b . Consolidation eliminating entries

             Calculation of goodwill

Acquision cost	20300,000
Book value	(7200,000)
Excess acquision - Book value	13100,000
Identi. intangibles	(2000,000)
Goodwill ( 13100,000 - 2000,000 )	11100,000