Question

Tyler Company acquired all of Jasmine Company’s outstanding stock on January 1, 2016, for $206,000 in cash. Jasmine had a book value of only $140,000 on that date. However, equipment (having an eight-year remaining life) was undervalued by $54,400 on Jasmine’s financial records. A building with a 20-year remaining life was overvalued by $10,000. Subsequent to the acquisition, Jasmine reported the following:

In accounting for this investment, Tyler has used the equity method. Selected accounts taken from the financial records of these two companies as of December 31, 2018, follow:

Determine and explain the following account balances as of December 31, 2018:

a. Investment in Jasmine Company (on Tyler’s individual financial records).

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b. Equity in Subsidiary Earnings (on Tyler’s individual financial records).

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c. Consolidated Net Income.

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d. Consolidated Equipment (net).

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e. Consolidated Buildings (net).

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f. Consolidated Goodwill (net).

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g. Consolidated Common Stock.

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h. Consolidated Retained Earnings, 12/31/18.

Answer 1

Consolidation

When a company acquires 50% or more shares of other company and due to this acquisition it has significant influence and control on the other company then the purchaser company is known as parent company and the other company is known as subsidiary company. In case of significant influence and control the parent company consolidates the financial statement of subsidiary.

While consolidating the financial statement the company will have to make adjustments for intra entity transactions. The intra entity transactions are excluded while preparing the consolidated financial statement.

Equity method

The parent company reports the investment in subsidiary based on the equity method that

is investment is recorded at cost and yearly adjustments are made for percentage share

in net income and dividend paid by subsidiary.

Calculate Goodwill on acquisition of company J is shown below

Hence, the Goodwill on acquisition is $21,600.

Following shows the working

a.

The investment in company J in the books of company T is calculated as follows

Thus, the value of investment in company J is

The value of investment in company J would increase by the net income of the company J and decrease by the dividend paid and amortization expense in each of the years.

Following shows the working

b.

Calculate equity in earnings in company J is shown below

The equity in earnings in company J is $23,700.

Company T has acquired all of the shares of company J and therefore the entire net income of company J would belong to company T which would be reduce by the annual amortization expense of $6,300 due to excess of purchase price paid over book value.

c.

Calculate consolidated net income

The consolidated net income is $135,700.

Following shows the working

d.

Calculate consolidated value of equipment (net)

Thus, the consolidated value of equipment (net) is $404,000.

e.

Calculate consolidated value of building (net)

Thus, the consolidated value of building (net) is $279,500.

f.

Calculate consolidated value of goodwill (net)

The consolidated value of goodwill would be goodwill recognized at the time of acquisition of company J which is $21,600 and the goodwill has indefinite life and therefore not subject to amortization.

Thus, the consolidated value of goodwill is $21,600.

g.

The consolidated value of common stock to be reported would be $290,000 which is the value of common stock of company T.

The value of common stock of company J would be eliminated in the consolidated as the common stock of company J is acquired by company T and is replaced by the value of assets and liabilities reported of company J.

Thus, the consolidated value of common stock is $290,000.

h.

The consolidated retained earnings to be reported would be that of company T which is $410,000.

The retained earnings of company J would be eliminated since equity method is followed and the assets and liabilities of company J are consolidated with that of company T.

Thus, the consolidated retained earnings as on 31 ^st December 2018 is $410,000.