Chapman Company obtains 100 percent of Abernethy Company\'s stock on January 1,
ID: 2547646 • 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 Credit $ 56,700 Debit 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 43,800 50,000 143,000 80,250 250,000 295,000 110,500 112,000 171,000 268,750 11,900 Totals $796,450 796,450 During 2017, Abernethy reported net income of $122,500 while declaring and paying dividends of $15,000. During 2018, Abernethy reported net income of $159,250 while declaring and paying dividends of $49,000 Assume that Chapman Company acquired Abernethy's common stock for $675,790 in cash. Assume that the equipment and long-term liabilities had fair values of $316,300 and $137,960, respectively, on the acquisition date. Chapman uses the initial value method to account for its investment. Prepare consolidation worksheet entries for December 31, 2017, and December 31, 2018. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)Explanation / Answer
Calculation of goodwill at the time of acquisition:
Purchase Price
675,790
Less: Book Value
Common stock
(250,000)
Additional paid in capital
(50,000)
Retained earnings 1/1/17
(268,750)
Excess price paid
107,040
Excess value of equipment over book value (295,000- 316,300)
(21,300)
Short Value of long term liabilities over book value (171,000 – 137,960)
(31,640)
Goodwill
52,700
Amortization of Excess/Short Assets and liabilities acquired at the time of acquisition
Original Value (A)
Useful life (B)
Amortization (A/B)
Equipment
21,300
5
4,260
Long term liabilities
31,640
4*
8,260
Goodwill
52,700
-
-
*1/1/2017-12/31/2020 = 4 years
Value of assets as on 1/1/18
Original Value (A)
Amortization (B)
Ending Value (A-B)
12/31/2017
Equipment
21,300
4,260
17,040
Long term liabilities
31,640
8,260
24,780
Goodwill
52,700
-
52,700
Journal Entries
S.No
Description
Debit
Credit
2017
S
Common stock
250,000
Additional paid in capital
50,000
Retained earnings 1/1/17
268,750
Investment in Abernethy
568,750
(to eliminate the stockholders’ equity subsidiary)
A
Equipment
21,300
Long term liabilities
33,040
Goodwill
52,700
Investment in Abernethy
107,040
(to recognize allocations of determined in connection with acquisitions)
I
Dividend Income
15,000
Dividend paid
15,000
(to eliminate the intercompany dividend)
E
Depreciation expense
4,260
Interest expense
8,260
Equipment
4,260
Long term liabilities
8,260
(to recognize 2017 amortization expenses)
2018
C
Investment in Abernethy
94,980
Retained Earnings – 1/1/18 (Chapman)
94,980
(Net income of subsidiary = 122,500
Less: Dividend = 15,000
Less: Amortization and interest = 12,810
(to convert parent company figures to equity method)
S
Common stock
250,000
Additional paid in capital
50,000
Retained earnings 1/1/18 (268,750+122,500-15,000)
376,250
Investment in Abernethy
676,250
(to eliminate beginning of the year stockholders’ account of subsidiary)
A
Equipment
17,040
Long term liabilities
24,780
Goodwill
52,700
Investment in Abernethy
94,520
(to recognize allocations relating to Investment balances.)
I
Dividend Income
49,000
Dividend paid
49,000
(to eliminate the intercompany dividend)
E
Depreciation expense
4,260
Interest expense
8,260
Equipment
4,260
Long term liabilities
8,260
(to recognize 2018 amortization expenses)
Purchase Price
675,790
Less: Book Value
Common stock
(250,000)
Additional paid in capital
(50,000)
Retained earnings 1/1/17
(268,750)
Excess price paid
107,040
Excess value of equipment over book value (295,000- 316,300)
(21,300)
Short Value of long term liabilities over book value (171,000 – 137,960)
(31,640)
Goodwill
52,700
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