Chapman Company obtains 100 percent of Abernethy Company’s stock on January 1, 2
ID: 2540277 • Letter: C
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:
During 2017, Abernethy reported net income of $106,500 while declaring and paying dividends of $13,000. During 2018, Abernethy reported net income of $142,750 while declaring and paying dividends of $51,000.
Assume that Chapman Company acquired Abernethy’s common stock for $759,900 in cash. As of January 1, 2017, Abernethy’s land had a fair value of $126,400, its buildings were valued at $211,600, and its equipment was appraised at $344,500. Chapman uses the equity method for this investment.
Prepare consolidation worksheet entries for December 31, 2017, and December 31, 2018
1. Prepare entry S to eliminate stockholders' equity accounts of subsidiary.
2. Prepare entry A to recognize allocations attributed to fair value of specific accounts at acquisition date with residual fair value recognized as goodwill.
3. Prepare entry I to eliminate $106,500 income accrual for 2017 less $4,800 amortization recorded by parent using equity method.
4. Prepare entry D to eliminate intra-entity dividend transfers.
5. Prepare entry E to recognize current year amortization expense.
6. Prepare entry S to eliminate beginning stockholders' equity of subsidiary—the Retained Earnings account has been adjusted for 2017 income and dividends. Entry *C is not needed because equity method was applied.
7. Prepare entry A 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].
8. Prepare entry I to eliminate $142,750 income accrual less $4,800 amortization recorded by parent during 2018 using equity method.
9. Prepare entry D to eliminate intra-entity dividend transfers.
10. Prepare entry E to recognize current year amortization expense.
Debit Credit Accounts payable $ 58,000 Accounts receivable $ 40,200 Additional paid-in capital 50,000 Buildings (net) (4-year remaining life) 170,000 Cash and short-term investments 66,750 Common stock 250,000 Equipment (net) (5-year remaining life) 372,500 Inventory 109,500 Land 116,000 Long-term liabilities (mature 12/31/20) 165,000 Retained earnings, 1/1/17 369,150 Supplies 17,200 Totals $ 892,150 $ 892,150Explanation / Answer
1. Entry to eliminate stockholders' accounts of subsidiary Date Acount Title Debit Credit Jan.1 ,2017 Common Stock - Abernethy 250000 Additional paid-in-capital - Abernethy 50000 Retained earnings -Abernethy 369150 Investment in Abernethy 669150 2. Entry to recognise allocation of excess value Date Acount Title Debit Credit Jan.1 ,2017 Land 10400 Buildings 41600 Goodwill 66750 Investment in Abernethy 90750 Equipment 28000 3.Entry to eliminate net income and amortization of excess of fair value Date Acount Title Debit Credit Dec.31, 2017 Amotization expense 4800 Investment in Abertheny 101700 Equity income from Abetheny 106500 4.Entry to eliminate dividend paid by abertheny Date Acount Title Debit Credit Dec.31, 2017 Cash 13000 Investment in Abertheny 13000 Working: Net Assets Cash 66750 Accounts Receivable 40200 Inventory 109500 Supplies 17200 Land 116000 Buildings 170000 Equipment 372500 892150 Les: Liabilities Accounts Payable 58000 Long term liabilities 165000 223000 Net Assets 669150 Exces fair value Land (126400-116000) 10400 Buildings(211600-170000) 41600 Equipment(344500-372500) -28000 Total value acquired 693150 Price Paid 759900 Goodwill 66750
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