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 $ 51,500 $ 46,500 50,000 190,000 67,750 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 250,000 442,500 107,000 93,500 166,500 448,250 19,000 $966,250 $966,250 During 2017, Abernethy reported net income of $99,000 while declaring and paying dividends of $12,000. During 2018, Abernethy reported net income of $151.250 while declaring and paying dividends of $53,000 Assume that Chapman Company acquired Abernethy's common stock for $866,800 in cash. As of January 1, 2017. Abernethy's land had a fair value of $110 900 its buildings were valued at $232 400 and its poinment was andraised at $418 250 Chanman lises the

Answer 1

Fair Value as on 1/1/2017 First we need to calculate the value assets taken over is overvalued or undervalued Book Value As on Assets 1/1/2017 (A) Land 93,500 Building 190,000 Equipment 442,500 J(B) Overvalued or (Undervalued) (B)-(A) 17,400 42,400 (24,250) 110,900 232,400 418,250 Calculation of Goodwill if any in acquisition Amount in $ 866,800 250,000 50,000 448,250 Description Purchase price Less: Book Value Common Stock Additional paid in capital Retained Earnings 1/1/17 Total Book Value of Abernethy Excess of Fair value Over Book value Allocation of Excess Fair value over book value: Land Building Equipment 748,250 118,550 17,400 42,400 (24,250) 35,550 83,000 Goodwill (118,550 - 35,550)

Life (A) Calculation of Depreciation expenses on Excess Value allocated to specified assets Value as on 01/01/17 Assets Land 17,400 Building 42,400 Equipment (24,250) Goodwill 83,000 Total 118,550 Depreciation per year Value as on (C= A/B) 01/01/18 (A-C) 17,400 10,600 31,800 (4,850) (19,400) 83,000 5,750 112,800 Calculation of retained earnings at the end of the year 12/31/2017 Description Amount Retained Earnings 1/1/17 Add: Net Income during the year 2017 Less: Dividends Paid 2017 Retained Earnings 12/31/17 448,250 99,000 (12,000) 535,250 Calculation of equity income in subsidiary Description Amount Year 2017 Income of Abernethy's during the year 2017 Less: Depreciation during the year Equity income in Abernethy's income for the year 2017 99,000 (5,750) 93,250 Year 2018 Income of Abernethy's during the year 2018 Less: Depreciation during the year Equity income in Abernethy's income for the year 2018 151,250 (5,750) 145,500

No Event Accounts Debit Credit Date Year 2017 December 31,2017 1 S Common stock Additional Paid in capital Retained Earnings - 1/1/17 Investment in Abernethy (Elimination Entries of Equity investment from the book value acquired) 250,000 50,000 448,250 748,250 December 31,2017 17,400 42,400 83,000 Land Building Goodwill Equipment Investment in Abernethy (to record excess value assets acquired in acquisition) 24,250 118,550 December 31,2017 93,250 Equity Income in Abernethy Investment in Abernethy (Elimination of Equity income from equity Investment) 93,250 4 D December 31,2017 12,000 Investment in Abernethy Dividends Paid |( Recording of dividend income from subsidiary) 12,000 December 31,2017 5,750 4,850 Depreciation Expenses Equipment Buildings ( Recording depreciation expense during the year) 10,600

Year 2018 December 31, 2018 Common stock Additional Paid in capital Retained Earnings -1/1/18 Investment in Abernethy |( Elimination Entries of Equity investment from the book value acquired) 250,000 50,000 535,250 835,250 7 A December 31,2018 L 17,400 31,800 83,000 Land Building Goodwill Equipment Investment in Abernethy (to record unamortized value of assets acquired as on 01/01/18) 19,400 112,800 December 31,2018 145,500 Equity Income in Abernethy Investment in Abernethy (Elimination of Equity income from equity Investment) 145,500 9 D December 31,2018 53,000 Investment in Abernethy Dividends Paid (Recording of dividend income from subsidiary) 53,000 December 31,2018 5,750 4,850 Depreciation Expenses Equipment Buildings |( Recording depreciation expense during the year) 10,600