Prime Company acquired 7596 of the common stock of Second Company on January 1,

Question

Prime Company acquired 7596 of the common stock of Second Company on January 1, year one, for The consideration given was proportional to Seconds fair value. On that date, Second had the following trial balance: $450,000 debitcredit account Additional paid in capital 100,000 Building (12-year life) 250,000 Common stock 170,000 170,000 160,000 110,000 Current assets Equipment (6-yr life) Land Liabilities (due in 4 years) Retained eamings 1/year 1 300,000 120,000 Totals 690,000 690,000 During year one, Second reported net income of During year one, Sonny paid dividends of $60,000 $30,000 During year two, Second reported net income of During year two, Sonny paid dividends of $80,000 $40,000 On January 1, year one, fair values were Land Building Equipment $146,000 $286,000 $184,000 There was no impairment of any goodwill arising from the acquisition. 1. Please indicate clearly which method you choose for Prime to use to account for its acquisition of Second Company 2. Use the data for the Prime Company acquisition of the Second Company to prepare the consolidation worksheet entries for the December 31, year one, 3. Use the data for the Prime Company acquisition of the Second Company to prepare the consolidation worksheet entries for the December 31, year two, worksheet

Explanation / Answer

purchase method should be used to account for acquisition of second company.

In the acquisition, the parent includes all the assets of the subsidiary on its consolidated blance sheet and includes all the subsidiaries revenues and expenses in its consolidated revenues and expenses. it creats a claim of others on the subsidiaries net assets.

investment in second company 450000 BV FMV % of total FV recognition value Building 250000 274000 45% 204139 equipment 160000 184000 30% 137086 land 110000 146000 24% 108775 604000 450000 journal entry(acquisition value) Debit Credit Building 204139 Equiptment 137086 Land 108775 Bank 450000

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