On January 1, 2018, Pen Corporation acquired 75% of the outstanding common stock of Sen Company for $450,000. There was no control premium. Sen’s stockholders’ equity on January 1, 2018, was as follows:
Common Stock, $20 par | $200,000 |
Additional Paid-In Capital | $110,000 |
Retained Earnings | $100,000 |
Differences between book value and fair value of the net identifiable assets of Sen Company on January 1, 2018, were limited to the following:
Book Value | Fair Value | |
Inventories (FIFO) | $40,000 | $39,400 |
Building (Net) [Remaining Life: 10 Years; Straight-Line Depreciation; No Salvage Value | $180,000 | $200,000 |
Pen uses the complete equity method to account for its investment in Sen. During 2018, Sen had a net income of $80,000. Sen’s cost of goods sold was $70,000 in 2018. On December 23, 2018, Sen declared and paid $50,000 cash dividend to its shareholders. Goodwill was unimpaired as of December 31, 2018.
1) Determine the fair value of the noncontrolling interest and goodwill at the time of acquisition. [There was no control premium. Additionally, we need to use the alternative way (book value or equity + fair value differences) to determine the fair value of net identifiable assets. Check figure: goodwill = $170,600.]
2) Prepare journal entries for Pen to record under the complete equity method of accounting the operating results of Sen in 2018.
3) Prepare the working paper eliminating entries C, E, R, O and N (in journal entry format) for Pen Corporation and subsidiary for the year ended December 31, 2018.
EQUITY | |
COMMON STOCK | $ 200,000 |
ADDITIONAL PAID IN CAPITAL | $ 110,000 |
RETAINED EARNINGS | $ 100,000 |
$ 410,000 | |
BOOK VALUE | |
INVENTORIES | $ 40,000 |
BUILDING | $ 180,000 |
$ 220,000 | |
FAIR VALUE | |
INVENTORIES | $ 39,400 |
BUILDING | $ 200,000 |
$ 239,400 |
FAIR VALUE DIFFERENCES | FAIR VALUE | BOOK VALUE | BOOK VALUE - FAIR VALUE |
INVENTORIES | $ 39,400 | $ 40,000 | $ 600 |
BUILDING | $ 200,000 | $ 180,000 | $ (20,000) |
TOTAL | $ (19,400) |
NON CONTROLLING INTEREST = 25% | |
SHARE IN ASSETS = $239,400 * 25% = $59,850 | $ 59,850 |
SHARE IN RETAINED EARNINGS = $ 100,000*25% = $25,000 | $ 25,000 |
SHARE IN PROFITS = $ 80,000 * 25% = $20,000 | $ 20,000 |
NON CONTROLLING INTEREST ON THE DATE OF ACQUISITION | $ 104,850 |
GOODWILL CALCULATION |
(FAIR VALUE DIFFERENCES + EQUITY) - BOOK VALUE OF ASSETS |
($ 410000-$19,400) - $ 220,000 |
$ 170,600 |
JOURNAL ENTRIES | |||
S.NO. | PARTICULARS | AMOUNT DEBIT | AMOUNT CREDIT |
1 | INVESTMENTS IN SEN | $ 60,000 | |
RETAINED EARNINGS | $ 60,000 | ||
(PEN'S SHARE IN INCOME OF SEN) | |||
2 | CASH | $ 37,500 | |
INVESTMENTS | $ 37,500 | ||
(PEN'S SHARE IN DIVIDEND OF SEN) |
SINCE NO INTER COMPANY TRANSACTIONS ARE THERE, NO INTER COMPANY ADJUSTING ENTRIES WOULD BE THERE.
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