Question

Chapter 4 (Pt 2) Python Corporation buys 80 percent of Shark Company on January 1, 2013, for $150,000. At the time, Shark's common stock was $100,000 and retained earnings totaled $80,000. It was determined that Shark's assets and liabilities were all at their fair value except for land. The trial balances of Python and Shark on December 31, 2013, are listed below. Shark Company Debit Credit $ 10,000 11,000 9,000 185,000 80,000 $ 10,000 Python Corporation Debit Credit Cash $ 25,000 Receivables (net) 10,000 Inventory, January 1 15,000 Investment in S 150,000 Plant and equipment (net 225,000 Land 100,000 Accounts payable $ 24,000 Other liabilities 100,000 Common stock ($10 par) 250,000 Retained earnings, January 1 135,000 Dividends declared 15,000 Sales 130,000 Dividend income 16,000 Purchases 55,000 Expenses 40,000 $635,000 $635,000 80,000 100,000 80,000 20,000 75,000 25,000 25,000 $365,000 $365,000 Inventory, December 31 $12,000 $10,000 A. Find the difference between implied and book value

Answer 1

A. Find the difference between book value and implied value

Particulars	Amount
Shark's Common stock on January 1, 2013	$100,000
Shark's retained earnings on January 1, 2013	$80,000
Net asset or shareholder's fund on January 1, 2013	$180,000	(a)
Purchase consideration paid by Python Corporation for 80% stake	$150,000	(b)
Net asset on January 1, 2013 to the extent Python Corporation share	$144,000	(c=a*80%)
Difference on account of value of land - to the extent Python's share	$6,000	(d=b-c)
Total difference on account of value of land	$7,500	e=d/80%
Book value of land	$80,000	given in question
Implied value of land	$87,500	(80000+7500)
Difference between book value and implied value	$7,500

B. Record the entries in Python's book to reflect its transaction with Shark in 2013, assuming cost method

To record initial investment

Date	Particulars	Debit	Credit
January 1, 2013	Investment in Shark Company	$150,000
	To Cash		$150,000
	(Being acquisiton of Shark Company recognised)

To record P's share of S's dividends

Date	Particulars	Debit	Credit
December 31, 2013	Cash	$16,000
	To Dividend income		$16,000
	(Being dividend income recognised)

C. Prepare the workpaper entries on December 31, 2013

To eliminate P's share of S's equity

Date	Particulars	Debit	Credit
December 31, 2013	Common Stock-Shark	$80,000		(100000*80%)
	Retained earnings, January 1, 2013-Shark	$64,000		(80000*80%)
	To Investment in Shark Company - Python		$144,000
	(Being P's share of S's equity eliminated)

To accomodate the difference between book value and implied value

Date	Particulars	Debit	Credit
December 31, 2013	Land-Shark Company	$7,500
	To Non controlling interest		$1,500	(7500-6000)
	To Investment in Shark Company		$6,000
	(Being difference between book value and implied value accomodated)

To eliminate P's share of S's dividends

Date	Particulars	Debit	Credit
December 31, 2013	Dividend income - Python	$16,000
	To Dividend declared - Shark		$16,000
	(Being P's share of S's dividends eliminated)

PS: If the answer is helpful a thumbs up would be appreciated