Question

Branson paid $621,000 cash for all of the outstanding common stock of Wolfpack, Inc., on January 1, 2017. On that date, the subsidiary had a book value of $433,000 (common stock of $200,000 and retained earnings of $233,000), although various unrecorded royalty agreements (10-year remaining life) were assessed at a $160,000 fair value. Any remaining excess fair value was considered goodwill.

In negotiating the acquisition price, Branson also promised to pay Wolfpack’s former owners an additional $70,000 if Wolfpack’s income exceeded $120,000 total over the first two years after the acquisition. At the acquisition date, Branson estimated the probability-adjusted present value of this contingent consideration at $49,000. On December 31, 2017, based on Wolfpack’s earnings to date, Branson increased the value of the contingency to $56,000.

During the subsequent two years, Wolfpack reported the following amounts for income and dividends:

	Net Income			Dividends Declared
2017	$	65,900		$	20,000
2018		75,900			30,000

In keeping with the original acquisition agreement, on December 31, 2018, Branson paid the additional $70,000 performance fee to Wolfpack’s previous owners.

Prepare each of the following:

1. Branson’s entry to record the acquisition of the shares of its Wolfpack subsidiary.

2. Branson’s entries at the end of 2017 and 2018 to adjust its contingent performance obligation for changes in fair value and the December 31, 2018, payment.

3. Prepare consolidation worksheet entries as of December 31, 2018, assuming that Branson has applied the equity method.

4. Prepare consolidation worksheet entries as of December 31, 2018, assuming that Branson has applied the initial value method.

Answer 1

JOURNAL ENTRIES

Part	Date	Account Title and Explanation	Debit $	Credit $
A)		Investment on Wolfpack	670,000
		Contingent performance obligation		49,000
		Cash		621,000
		(To record the acquisition of the shares of its Wolfpack subsidiary)
B)	Dec.31,2017	Loss from increase in contingent performance obligation	7,000
		Contingent performance obligation		7,000
		(To adjust contingent performance obligation for changes in fair value at the end of 2017) (56,000-49,000)
	Dec.31,2018	Loss from increase in contingent performance obligation	14,000
		Contingent performance obligation		14,000
		(To adjust contingent performance obligation for changes in fair value at the end of 2018) (70,000-56,000)
	Dec.31,2018	Contingent performance obligation	70,000
		Cash		70,000
		(To record payment at Dec.31, 2018)
C) CONSOLIDATED WORKSHEET ENTRIES- EQUITY METHOD
1		Common stock-Wolfpack	200,000
		Retained earnings - Wolfpack (233,000+65,900-20,000)	278,900
		Investment in Wolfpack		478,900
2		Royalty agreements [160,000-(160,000/10)]	144,000
		Goodwill (Working-1)	77,000
		Investment in Wolfpack		221,000
3		Equity earnings in Wolfpack (75,900-16,000)	59,900
		Investment in Wolfpack		59,900
4		Investment in Wolfpack	30,000
		Dividends declared		30,000
5		Amortization expense (160,000/10)	16,000
		Royalty agreements		16,000

Working-1 :

Calculation of goodwill

Consideration given = 621,000 + 49,000

= 670,000

Book value received = 200,000+233,000

= 433,000

Excess = 670,000 - 433,000

= 237,000

Allocation of royalty agreement = 160,000

Goodwill = 237,000-160,000

= 77,000

D) CONSOLIDATED WORKSHEET ENTRIES- INITIAL VALUE METHOD
1		Investment in Wolfpack	29,900
		Retained earnings - Branson (75,900+16,000-30,000)		29,900
2		Common stock	200,000
		Retained earnings - Wolfpack	278,900
		Investment in Wolfpack		478,900
3		Royalty agreements	144,000
		Goodwill	77,000
		Investment in Wolfpack		221,000
4		Dividend Income	30,000
		Dividends paid		30,000
5		Amortization expense (160,000/10)	16,000
		Royalty agreements		16,000

Please rate positively if this helped you :)

All the best for your bright future.