Question

Assume that on January 1, 2017, Company P acquires 70% of the common stock of Company S by paying $7,000 in cash to the shareholders of Company S. The preacquisition balance sheets and income statements of Company P and Company S are shown below. Prepare Company P's post-acquisition B/S right afer the acquisition (Jan. 1) and at the end of the year of 2017 by the equity and acquisition method s. Also, prepare Company P's post-acquisition I/S for the year of 2017 by the equity and acquisition methods.

Pre-Acquisition Balance Sheets January 1,2017 Assets Total Assets Company P Company S $80,000 $80,000 $24,000 $24,000 $40,000 $14,000 Current liabilities Equity Common stock Retained earnings Total Liabilities & Equity 28,000 12,000 $80,000 6,000 4,000 $24,000 Income statements Year ended December 31, 2017 Revenue Expenses Net income Dividends paid $60,000 (40,000) $20,000 $20,000 (16,000 $4,000

Answer 1

Equity Method: In this method the investment is initially recorded in the balance sheet at cost. In subsequent period, the carrying amount is adjusted to recognise the investor's proportionate share of the investee's earnings or losses, and these earnings or losses is reported in income statement of the investor. Dividend or other distribution received from investee is treated as return of capital which is reduced from the carrying amount of investment.

Acquisition Method: In this method, all the assets, liabilities, revenue and expenses of the subsidiary are combined with the parent company. Intercompany transactions are excluded. In case the parent owns less than 100% of the subsidiary, then non controlling interest account is created for the proportionate share of the subsidiary's net assets and net income that is not owned by the parent company.