Question

Chapman Company obtains 100 percent of Abernethy Company’s stock on January 1, 2017. As of that...

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 $ 52,400
Accounts receivable $ 48,600
Additional paid-in capital 50,000
Buildings (net) (4-year remaining life) 179,000
Cash and short-term investments 61,250
Common stock 250,000
Equipment (net) (5-year remaining life) 260,000
Inventory 121,500
Land 105,000
Long-term liabilities (mature 12/31/20) 174,500
Retained earnings, 1/1/17 264,650
Supplies 16,200
Totals $ 791,550 $ 791,550

During 2017, Abernethy reported net income of $86,000 while declaring and paying dividends of $11,000. During 2018, Abernethy reported net income of $124,500 while declaring and paying dividends of $47,000.

Assume that Chapman Company acquired Abernethy’s common stock for $675,160 in cash. Assume that the equipment and long-term liabilities had fair values of $284,350 and $142,140, respectively, on the acquisition date. Chapman uses the initial value method to account for its investment.

Prepare consolidation worksheet entries for December 31, 2017, and December 31, 2018.

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Answer #1
  • Calculations and Entries for 31.12.2017

1.Total Stockholders Equity = Additional Paid in capital + Common Stock + Retained Earnings

= 50,000 + 250,000 + 264,650 = 564,650

2.Difference of Acquisition Price and Total Stockholders Equity = 675,160 - 564650 = 110,510

3.Equipment Fair Value = 284,350 Book Value = 260,000

Difference = 284,350 - 260,000 = 24,350

4. Long term Liability Fair Value = 142,140 Book Value = 174,500

Difference = 174500 - 142140 = 32,360

5. Excess of Fair Value over Book Value = 24,350 + 32,360 = 56,710

6. Goodwill = 110,510 - 56710 = 53,800

7. Amortization of Equipment = 24,350/5 = 4,870

8. Amortization of Long Term Liability = 32360/4 = 8,090

9. Total Amortization = 4,870 + 8,090 = 12,960

10. Equity Income = Net Income - Amortization = 86,000 - 12,960 = 73,040

  • Journal Entries
Particulars Amount ($) Amount ($)

Common Stock.....Dr.

250,000
Additional Paid In Capital.....Dr. 50,000
Retained Earnings.....Dr. 264,650
To Investment in Company A 564,650
Equipment....Dr. 24,350
Long Term Liability....Dr. 32,360
Goodwill....Dr. 53,800
To Investment in Company A 110,510
Equity Earnings In Company A....Dr. 73,040
To Investment in Company A 73,040
Dividend Income....Dr. 11,000
To Dividend Paid 11,000
Depreciation.....Dr. 4,870
Interest.....Dr. 8,090
To Equipment 4,870
To Long Term Liability 8,090
  • Calculations and Entries for 31.12.2018

1. Retained Earnings for Company C - Dividends - Amortization = 86,000 - 11,000 - 12,960 = 62,040

​​​​​​​ 2. Retained Earnings for Company C at the beginning of 2018

= Retained Earnings on 1.1.17 + Net Income of 2017 - Dividends

= 264,650 + 86,000 - 11,000 = 339,650

3. Total Investment in Company A = 564,650 + 86,000 - 11,000 = 639,650

4. Balance of Total Fair Value over Book Value - Amortization = 110,510 - 12,960 = 97,550

5. Balance of Fair Value over Book Value for Equipment - Amortization = 24,350 - 4,870 = 19,480

6. Balance of Fair Value over Book Value for Long Term Liability - Amortization = 32,360 - 8,090 = 24,270

  • Journal Entries
Particulars Amount ($) Amount ($)
Investment in Company A.....Dr. 62,040
To Retained Earnings on 1.1.18 62,040
Common Stock.....Dr. 250,000
Additional Paid In Capital.....Dr. 50,000
Retained Earnings......Dr. 339,650
To Investment in Company A 639,650
Equipment.....Dr. 19,480
Long Term Liability.....Dr. 24,270
Goodwill.....Dr. 53,800
To Investment in Company A 97,550
Dividend Income....Dr. 47,000
To Dividend Paid 47,000
Depreciation.....Dr. 4,870
Interest.....Dr. 8,090
To Equipment 4,870
To Long Term Liability 8,090
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