Ellsworth acquired Merrell on January 1, 2008 by issuing shares of common stock.

Question

Ellsworth acquired Merrell on January 1, 2008 by issuing shares of common stock. On January 1, 2008 all of Merrell's assets and liabilities had fair values equal to book value except for the following: land was undervalued by $20,000 buildings were undervalued by $300,000 (20-year remaining useful life) equipment was overvalued by $60,000 (6-year remaining useful life) In addition, a customer list with an appraised value of $200,000 and a 10-year useful life had been developed internally by Merrell. Assume Ellsworth originally acquired Merrell for the fair value of its net identifiable assets, which was $810,000 at the date of acquisition. Merrell's Retained Earnings balance at the date of acquisition was $150,000. The following are selected accounts for Ellsworth Company and Merrell, Inc. as of December 31, 2014 (Ellsworth's Investment in Merrell and Equity in Merrell's Income accounts have been omitted). Credit balances are indicated by parentheses. Assume Ellsworth uses the equity method and prepare consolidation entries for 2014

Explanation / Answer

Effect of fair value not Taken now taken Incresae or decresease Land $20,000 Bulding 300000 Less: Accumulated Depreciation (300000/20)*7 years 105000 195000 Equipment -60000 Less: Accumulated Depreciation (60000/6)*7 years No effect as no exsitence in 7 year Intagible Asset 200000 Less: Amortized (200000/10)*7 140000 60000 Total increase on asset on 31 Dec Difference Between Book vale and market value, it’s a Gain $275,000 Investment in Merrel (Land,equipment,intangible asset) $275,000 Equity Income $275,000 (At the time of acqusition it was taken incorrectly) Investment in Merrel (450000-200000-150000) $100,000 Equity Income $100,000 (Consolidating the Income) Cash 40000 Investment in Merrel 40000 (Distribution of Dividend)

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