Question

Chapman Company obtains 100 percent of Abernethy Company’s stock on January 1, 2017. As of that date, Abernethy has the following trial balance:

	Debit			Credit
Accounts payable				$	59,900
Accounts receivable	$	43,700
Additional paid-in capital					50,000
Buildings (net) (4-year remaining life)		123,000
Cash and short-term investments		80,500
Common stock					250,000
Equipment (net) (5-year remaining life)		270,000
Inventory		138,500
Land		118,500
Long-term liabilities (mature 12/31/20)					175,000
Retained earnings, 1/1/17					257,100
Supplies		17,800
Totals	$	792,000		$	792,000

During 2017, Abernethy reported net income of $112,000 while declaring and paying dividends of $14,000. During 2018, Abernethy reported net income of $163,250 while declaring and paying dividends of $54,000.

Assume that Chapman Company acquired Abernethy’s common stock for $651,550 in cash. As of January 1, 2017, Abernethy’s land had a fair value of $132,100, its buildings were valued at $166,600, and its equipment was appraised at $242,750. Chapman uses the equity method for this investment.

Prepare consolidation worksheet entries for December 31, 2017, and December 31, 2018. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Firstly we have to check whether value assets taken over is overvalued or undervalued

Assets	Book value as at 01/01/2017 (1)	Fair value as at 01/01/2017 (2)	Overvalued or undervalued (2) - (1)
Land	118,500	132,100	13,600
Building	123,000	166,600	43,600
Equipment	270,000	242,750	(27,250)

Calculation of goodwill in acquisition (if any)

Particulars		Amount ($)
Purchase cost		651,550
Less: Book value
Common stock	250,000
Additional paid in capital	50,000
Retained earning 01/01/2017	257,100
Total book value		557,100
Fair value less book value		94,450
Allocation of fair value less book value:
Land	13,600
Building	43,600
Equipment	(27,250)
	29,950
Value of Goodwill (94,450-29,950)	64,500

Calculation of unamortised values of excess value os assets acquired in acquisition

Assets	Value as on 01/01/2017 (1)	Depreciation per year (2)	Value as on 01/01/2018 (1-2)
Land	13,600	-	13,600
Building	43,600	10,900	32,700
Equipment	(27,250)	(5,450)	(21,800)
Goodwill	64,500	-	64,500
Total	94,450	5,450	89,000

Calculation of depreciation on allocated excess values to specified assets

Assets	Value as on 01/01/2017 (1)	Life (2)	Depreciation per year (1/2)
Land	13,600	-	-
Building	43,600	4	10,900
Equipment	(27,250)	5	(5,450)
Goodwill	64,500	-	-
Total	94,450		5,450

Calculation of retained earnings as at 31/12/2017 and 31/12/2018

Particulars	Amount
Retained earnings as at 01/01/2017	257,100
Add: Income during year	112,000
Less: Dividend paid	(14,000)
Retained earning as at 31/12/2017	355,100
Retained earnings as at 01/01/2018	355,100
Add: Income during year	163,250
Less: Dividend paid	(54,000)
Retained earnings as at 31/12/2018	464,350

Calculation of equity income in subsidiary

Particulars	Amount
2017
Abernethy's income during the year	112,000
Less: Depreciation	(5,450)
Equity income for year 2017	106,550
2018
Abernethy's income during the year	163,250
Less: Depreciation	(5,450)
Equity income for year 2017	157,800

No	Date	Particulars	Debit	Credit
	2017
	31/12/2017	Common stock	250,000
		Additional paid in capital	50,000
		Retained earnings 01/01/2017	257,100
		Investment in Abernethy		557,100
		(Being elinination entries passed of equity investment from book value acquired)
	31/12/2017	Land	13,600
		Building	43,600
		Goodwill	64,500
		Equipment		27,250
		Investment in Abernethy		94,450
		(Being excess value assets acquired in acquisition recorded)
	31/12/2017	Equity income in Abernethy	106,550
		Investment in Abernethy		106,550
		(Being entry recorded for elimination of equity income from equity investment)
	31/12/2017	Investment in Abernethy	14,000
		Dividend paid		14,000
		(Being dividend income from subsidiary recorded)
	31/12/2017	Depreciation	5,450
		Equipment	5,450
		Building		10,900
		(Being depreciation expense recorded)
	2018
	31/12/2018	Common stock	250,000
		Additional paid in capital	50,000
		Retained earnings - 01/01/2018	355,100
		Investment in Abernethy		655,100
		(Being elinination entries passed of equity investment from book value acquired)
	31/12/2018	Land	13,600
		Building	32,700
		Goodwill	64,500
		Equipment		21,800
		Investment in Abernethy		89,000
		(Being unamortised value of assets acquired as on 01/01/2018 recorded)
	31/12/2018	Equity income in Abernethy	157,800
		Investment in Abernethy		157,800
		(Being entry recorded fro eliminating equity income from equity investment)
	31/12/2018	Investment in Abernethy	54,000
		Dividends paid		54,000
		(Being dividend income from subsidiary recorded)
	31/12/2018	Depreciation expense	5,450
		Equipment	5,450
		Buildings		10,900
		(Being depreciation expense during the year recorded)

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