Question

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 57,300 $ $ 42,200 50,000 214,000 82,250 250,000 Accounts payable Accounts receivable Additional paid-in capital Buildings (net) (4-year remaining life) Cash and short-term investments Common stock Equipment (net) (5-year remaining life) Inventory Land Long-term liabilities (mature 12/31/20) Retained earnings, 1/1/17 Supplies Totals 375,000 90,500 117,000 170,000 409,650 16,000 $936,950 $ 936,950 During 2017, Abernethy reported net income of $117,500 while declaring and paying dividends of $15,000. During 2018, Abernethy reported net income of $171,250 while declaring and paying dividends of $55,000. Assume that Chapman Company acquired Abernethy's common stock for $816,280 in cash. Assume that the equipment and long-term liabilities had fair values of $396,950 and $140,720, 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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

• Prepare entry S to eliminate stockholders' equity accounts of subsidiary.

• 2

  Prepare entry A to recognize allocations determined above in connection with acquisition-date fair values.

• 3

  Prepare entry I to eliminate intra-entity dividend declarations recorded by parent as income.

• 4

  Prepare entry E to recognize 2017 amortization expense.

• 5

  Prepare entry *C to convert parent company figures to equity method by recognizing subsidiary's increase in book value for prior year [$117,500 net income less $15,000 dividend declaration] and excess amortizations for that period [$11,710].

• 6

  Prepare entry S to eliminate beginning of year stockholders' equity accounts of subsidiary. The retained earnings balance has been adjusted for 2017 net income and dividends.

• 7

  Prepare entry A to recognize allocations relating to investment—balances shown here are as of the beginning of the current year [original allocation less excess amortizations for the prior period].

• 8

  Prepare entry I to eliminate intra-entity dividend declarations recorded by parent as income.

• 9

  Prepare entry E to recognize 2018 amortization expense.

Answer 1

Answer: (Two years of consolidation entries. Parent uses equity method.)
Fair Value Allocation and Annual Amortization:
Acquisition fair value (consideration transferred)	$816,280
Book value (assets minus liabilities or total stockholders'equity)	($709,650)
Excess fair value over bookvalue	$106,630
Excess fair value assigned to specific accounts based on individual fair values		Life	Annual Excess Amortizations
Long Term Liabilities	$29,280	4	$7,320
Equipment	$21,950	5	$4,390
Total assigned to specific accounts	$51,230
Goodwill	$55,400	Indefinite	$0
Total	$106,630		$11,710
Consolidation Entries as of December 31, 2017
	Debit	Credit
Entry S
Common Stock at Abernethy	$250,000
Additional Paid in Capital	$50,000
Retained Earnings as on 01/01/2017	$409,650
To Investment in Abernethy		$709,650
(To eliminate stockholders' equity accounts of subsidiary)
Entry A
Long Term Liabilities	$29,280
Equipment	$21,950
Goodwill	$55,400
To Investment in Abernethy		$106,630
(To recognize allocations attributed to fair value of specific accounts at acquisition date with residual fair value recognized as goodwill).
Entry I
Equity in Subsidiary Earnings	$105,790
To Investment in Abernethy		$105,790
(To eliminate $117,500 income accrual for 2017 less $11,710 amortization recorded by parent using equity method)
Investment in Abernethy	$15,000
To DividendsPaid		$15,000
(To eliminate inter-company dividend transfers)
Entry E
Depreciation expense	$4,390
Interest Expense	$7,320
To Equipment		$4,390
To Long Term Liabilities		$7,320
(To record current year amortization expense)
Consolidation Entries as of December 31, 2018
Entry S
Common Stock at Abernethy	$250,000
Additional Paid in Capital	$50,000
Retained Earnings as on 1/1/18	$512,150
To Investment in Abernethy		$812,150
(To eliminate beginning stockholders' equity of subsidiary and the Retained Earnings account has been adjusted for 2017 income and dividends.)
Entry *C is not required because the equity method has been applied.
Entry A
Long Term Liabilities	$21,960
Equipment	$17,560
Goodwill	$55,400
To Investment in Abernethy		$94,920
(To recognize allocations relating to investment and balances shownhere are as of beginning of current year [original allocation less excess amortizations for the prior period])
Entry I
Equity in Subsidiary Earnings	$159,540
To Investment in Abernethy		$159,540
(To eliminate $171,250 income accrual less $ 11,710 amortization recorded by parent during 2018 using equity method)
Entry D
Investment in Abernethy	$55,000
To Dividends Paid		$55,000
(To eliminate intercompany dividend transfers)
Entry E
Depreciation expense	$4,390
Interest Expense	$7,320
To Equipment		$4,390
To Long Term Liabilities		$7,320
(To record current year amortization expense)