Chapman Company obtains 100 percent of Abernethy Company’s stock on January 1, 2
ID: 2423574 • Letter: C
Question
Chapman Company obtains 100 percent of Abernethy Company’s stock on January 1, 2014. As of that date, Abernethy has the following trial balance: Debit Credit Accounts payable $ 50,000 Accounts receivable $ 40,000 Additional paid-in capital 50,000 Buildings (net) (4-year life) 120,000 Cash and short-term investments 60,000 Common stock 250,000 Equipment (net) (5-year life) 200,000 Inventory 90,000 Land 80,000 Long-term liabilities (mature 12/31/17) 150,000 Retained earnings, 1/1/14 100,000 Supplies 10,000 Totals $ 600,000 $ 600,000 During 2014, Abernethy reported net income of $80,000 while declaring and paying dividends of $10,000. During 2015, Abernethy reported net income of $110,000 while declaring and paying dividends of $30,000. Assume that Chapman Company acquired Abernethy’s common stock for $490,000 in cash. As of January 1, 2014, Abernethy’s land had a fair value of $90,000, its buildings were valued at $160,000, and its equipment was appraised at $180,000. Chapman uses the equity method for this investment. Prepare consolidation worksheet entries for December 31, 2014, and December 31, 2015.
Explanation / Answer
Answer: (Consolidation entries for two years. Parent uses equity method.)
Fair Value Allocation and Annual Amortization:
Acquisition fair value (consideration transferred) $490,000
Book value (assets minus liabilities or total stockholders' equity) (400,000)
Excess fair value over book value $90,000
Consolidation Entries as of December 31, 2014
Entry S
Common Stock—Abernethy 250,000
Additional Paid in Capital 50,000
Retained Earnings—1/1/14 100,000
To Investment in Abernethy 400,000
(To eliminate stockholders' equity accounts of subsidiary)
Entry A
Land 10,000
Buildings 40,000
Goodwill 60,000
To Equipment 20,000
To Investment in Abernethy 90,000
(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 74,000
To Investment in Abernethy 74,000
(To eliminate $80,000 income accrual for 2014 less $6,000 amortization recorded by parent using equity method) Entry D
Investment in Abernethy 10,000
To Dividends Paid 10,000
(To eliminate inter-company dividend transfers)
Entry E
Depreciation expense 6,000
Equipment 4,000
To Buildings 10,000
(To record current year amortization expense)
Consolidation Entries as of December 31, 2015
Entry S
Common Stock—Abernethy 250,000
Additional Paid in Capital 50,000
Retained Earnings—1/1/15 170,000
To Investment in Abernethy 470,000
(To eliminate beginning stockholders' equity of subsidiary—the Retained Earnings account has been adjusted for 2014 income and dividends.Entry *C is not needed because equity method was applied.)
Entry A
Land 10,000
Buildings 30,000
Goodwill 60,000
Equipment 16,000
To Investment in Abernethy 84,000
(To recognize allocations relating to investment—balances shown here are as of beginning of current year [original allocation less excess amortizations for the prior period])
Entry I
Equity in Subsidiary Earnings 104,000
To Investment in Abernethy 104,000
(To eliminate $110,000 income accrual less $6,000 amortization recorded by parent during 2015 using equity method)
Entry D
Investment in Abernethy 30,000
To Dividends Paid 30,000
(To eliminate intercompany dividend transfers)
Entry E
Depreciation expense 6,000
Equipment 4,000
To Buildings 10,000
(To record current year amortization expense)
Excess fair value assigned to specific accounts based on individual fair values Life Annual Excess Amortizations Land 10000 Building 40000 4 10000 Equipment -20000 5 -4000 Total assigned to specific accounts 30000 Goodwill 60000 Indefinite 0 Total 90000 6000Related Questions
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