Question

On January 1, 2019, Penguin Corporation bought 80% of the stock of Sea Gull Corporation for $700,000. The Balance Sheets of the two companies immediately after the acquisition (January 1, 2019) of Sea Gull Corp. showed the following amounts:

PenguinSea Gull as Accounts Receivable Inventory Land Buildings & Equipment - Net Investment in Sea Gull $ 140,000 $ 100,000 110,000 30,000 500,000 10,000 400,000 140,000 1,000,000 420,000 700.000 Total Assets 2,850,000 700,000 Accounts Payable Long-Term Liabilities Common Stock Additional Paid in Capital Retained Earnings 410,000 80,000 1,090,000 20,000 1,000,000 400,000 100,000 350,000 100,000 Total Liabilities and Stockholders' Equity $2,850,000 700,000

On the date of acquisition, the Book Value of Sea Gull equaled its Fair Market Value, except for land that had a fair market value of $200,000, the fair value of previously unrecorded identifiable intangibles (2-year life) of Sea Gull was $40,000, and the NonControlling Interest's fair value is $175,000. Penguin uses the complete equity method to record its investment in Sea Gull. During 2019, Penguin found that a $7,000 impairment of goodwill took place during 2019. The following is the trial balance data for Penguin and Sea Gull on December 31, 2019:

Required:

A. Prepare the journal entries Penguin made during 2019 related to its investment in Sea Gull.

B. Prepare the consolidation eliminating entries needed to be made to consolidate the two companies at the end of 2019. *Also identify which of these eliminating entries are exactly the same as those that would have been done if a consolidation had been immediately done after the acquisition.

C. Prepare the consolidation working paper. Show all necessary Elimination entries in their proper columns.

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Answer 1

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	Consideration transferred for 80%		$ 700,000
	Non controlling interest fair value		$ 175,000
	Total fair value		$ 875,000
	Less: Book value		$-600,000
	Excess fair value		$ 275,000
	Allocation:			Life	Annual Depreciation
	Land		$    60,000
	Intangibles		$    40,000	2 Year	$                     20,000
	Goodwill		$ 175,000		$                       7,000	Impairment
Event	Account	Debit	Credit
a	Investment in Seagull Co	$   120,000
	Income from Seagull Co		$ 120,000
	(To record Penguin share from Seagull Co income)
b	Cash	$     40,000
	Investment in Seagull Co		$    40,000
	(To record dividend income from Seagull)
c	Income from Seagull Co	$     21,600
	Investment in Seagull Co		$    21,600
	(To record amortization of exces acquisition price)
d	Common Stock	$   400,000
	Additional Paid in capital	$   100,000
	Retained Earning	$   100,000
	Income from Seagull Co	$   120,000
	NCI in NI of Seagull Co	$     30,000
	Dividends declared		$    50,000
	Investment in Seagull Co		$ 560,000
	NCI in NA of Seagull co		$ 140,000
	(To record basic consolidation entry)
	Common Stock	$   400,000
	Additional Paid in capital	$   100,000
	Retained earning	$   100,000	Penguin	NCI
		$   600,000	$ 480,000	$         120,000
	Add Net Income	$   150,000	$ 120,000	$            30,000
	Less Dividend	$    -50,000	$ -40,000	$          -10,000
			$ 560,000	$         140,000
e	Depreciation Expense	$     20,000
	Goodwill Impairment Loss	$        7,000
	Income from Seagull Co		$    21,600
	NCI in NI of Seagull Co		$      5,400
	(To record amortized excess value reclass)
f	Building and Equipment	$     40,000
	Land	$     60,000
	Goodwill	$   168,000
	Accumultaed Depreciation		$    20,000
	Investment in Seagull Co		$ 198,400
	NCI in NA of Seagull co		$    49,600
	(To record excess value reclass)
g	Accumulated Depreciation	$     40,000
	Building and Equipment		$    40,000
	(To record option dep elimination)
		Penguin	Seagull	Elimination Entries
				DR	CR	Consolidated
	Income Statement
	Sales	$   910,000	$ 450,000			$    1,360,000
	Less: COGS	$ -550,000	$-220,000			$      -770,000
						$                  -
	Less: Depreciation Expense	$ -130,000	$ -50,000	$            20,000		$      -200,000
						$                  -
	Less: Other Expense	$    -20,000	$ -30,000			$        -50,000
	Less: Impairment Loss	$              -	$            -	$              7,000		$          -7,000
	Income from Seagull Co	$     98,400		$         120,000	$                     21,600	$                  -
	Consolidated Net Income	$   308,400	$ 150,000	$         147,000	$                     21,600	$       333,000
	NCI in Net Income			$            30,000	$                       5,400	$        -24,600
	Controlling Interest in Net Income	$   308,400	$ 150,000	$         177,000	$                     27,000	$       308,400
	Statement of Retained Earnings
	Beginning Balance	$   350,000	$ 100,000	$         100,000		$       350,000
	Net Income	$   308,400	$ 150,000	$         177,000	$                     27,000	$       308,400
	Less: Dividends Declared	$ -100,000	$ -50,000		$                     50,000	$      -100,000
	Ending Balance	$   558,400	$ 200,000	$         277,000	$                     77,000	$       558,400
	Balance Sheet
	Cash	$   290,000	$ 100,000			$       390,000
	Receivables	$   210,000	$ 190,000			$       400,000
	Inventory	$   400,000	$    50,000			$       450,000
	Land	$   300,000	$ 140,000	$            60,000		$       500,000
	Buildings & Equipment	$1,100,000	$ 330,000	$            40,000	$                     40,000	$    1,430,000
	Less: Accumulated Depreciation			$            40,000	$                     20,000	$         20,000
	Investment in Seagull co	$   758,400			$                   560,000	$                  -
					$                   198,400
	Goodwill			$         168,000		$       168,000
	Total Assets	$3,058,400	$ 810,000	$         308,000	$                   818,400	$    3,358,000
	Accounts Payable	$   400,000	$ 100,000	$                    -		$       500,000
						$                  -
	Long term Notes Payable	$1,100,000	$    10,000			$    1,110,000
	Common Stock	$1,000,000	$ 400,000	$         400,000		$    1,000,000
	Additional Paid in capital	$              -	$ 100,000
	Retained Earnings	$   558,400	$ 200,000	$         277,000	$                     77,000	$       558,400
	NCI in NA of Seagull Co.				$                   140,000	$       189,600
					$                     49,600
	Total Liabilities & Equity	$3,058,400	$ 810,000	$         677,000	$                   266,600	$    3,358,000