B326 MTA Revision

 In January 1, 2017 Lake Company has acquired 90% of Pink Company for $3,150,000 on the
date of the acquisition the subsidiary had retained earnings $900,000 and a capital of $2,100,000.
Separate balance sheet as of 1 January 2017 for Lake Company and its Subsidiary.

Parent Subsidiary

Cash 60,000 85,000

Receivable 35,000 40,000
Land 1,550,000 750,000
Property 1,500,000 2,200,000
Investment in Subsidiary 3,150,000 -
Total assets 6,295,000 3,075,000

Account payable 55,000 60,000

Other liabilities 87,000 15,000
Capital stock 4,900,000 2,100,000
Retained earnings 1,253,000 900,000
Total equity and liabilities 6,295,000 3,075,000
a. Prepare the journal entry on parent’s books to account for the investment in subsidiary
b. Is there any Goodwill raised from the business combination? If yes, compute the amount
of Goodwill.
c. Record the elimination entry required for consolidation as of January 1, 2017.
d. Prepare the consolidated balance sheet Workpaper as of January 1, 2017.
e. Calculate the Investment amount of the parent and Non-controlling interest in the
subsidiary as of January 1, 2018, assuming that on December 31, 2017, the subsidiary has
distributed $10,000 of cash dividends and has a net income of $90,000.
Answer
a. The parent entry to account for the investment in subsidiary.
Dr Cr
Investment in subsidiary 3,150,000
Cash 3,150,000
b. Goodwill

𝑎𝑚𝑜𝑢𝑛𝑡 𝑝𝑎𝑖𝑑 3,150,000

Total FV= % 𝑜𝑤𝑛𝑒𝑟𝑠ℎ𝑖𝑝 = = 3,500,000
90%

Excess = 3,500,000 – (2,100,000+ 900,000) = 500,000

Goodwill = 500,000
 c. Elimination entry required for consolidation as of January 1, 2017.
Dr Cr
Capital stock- subsidiary 2,100,000
RE – subsidiary 900,000
Goodwill 500,000
Investment in subsidiary 3,150,000
NCI-Equity 350,000

d. The consolidated balance sheet Workpaper as of January 1, 2017.

adjustment Consolidated
Parents Subsidiary
Dr. Cr balance sheet
Cash 60,000 85,000 145,000
Receivable 35,000 40,000 75,000
Land 1,550,000 750,000 2,300,000
Property 1,500,000 2,200,000 3,700,000
Investment in Subsidiary 3,150,000 - 315,0000 -
goodwill 500,000 500,000
Total assets 6,295,000 3,075,000 6,720,000

Account payable 55,000 60,000 115,000

Other liabilities 87,000 15,000 102,000
Capital stock 4,900,000 2,100,000 2,100,000 4,900,000
Retained earnings 1,253,000 900,000 900,000 1,253,000
NCI-Equity 350,000 350,000
Total equity and liabilities 6,295,000 3,075,000 6,720,000

e.
New investment amount - parent
Original Amount 3,150,000
Add: adjusted net income (90,000*90%) 81,000
Less: Dividends (10,000* 90%) (9,000)
= new investment 3,222,000

New NCI
Original Amount 350,000
Add: adjusted net income (90,000*10%) 9,000
Less: Dividends (10,000* 10%) (1,000)
= new NCI 358,000
 In January 1, 2017 P Company has acquired 75% of S Company for $487,500 on the date of the
acquisition the subsidiary had retained earnings $145,500 and a capital of $413,500.
 Separate balance sheet as of 1 January 2017 for Parent and its Subsidiary.
Subsidiary
Parent
at Book value at fair value
Cash 11,250 67,750 67,750
Receivable 15,000 35,000 35,000
Land 195,000 100,000 125,000
Property 375,000 375,000 400,500
Investment in Subsidiary 487,500 -
Total assets 1,083,750 577,750

Account payable 6,250 15,000 13,750

Other liabilities 31,250 3,750 4,000
Capital stock 950,000 413,500
Retained earnings 96,250 145,500
Total equity and liabilities 1,083,750 577,750
Required:
a. Prepare the journal entry on parent’s books to account for the investment in subsidiary.
b. Prepare the required elimination entries as of January 1, 2017. Show your computations for
excess of fair value over book value and Goodwill
c. Prepare the consolidated balance sheet for parent and subsidiary as of January 1, 2017.
Answer
a. The parent entry to account for the investment in subsidiary.
Dr. Cr.
Investment in subsidiary 487,500
Cash 487,500
b. The excess of fair value over book value and Goodwill :
𝑎𝑚𝑜𝑢𝑛𝑡 𝑝𝑎𝑖𝑑 487,500
FV= % 𝑜𝑤𝑛𝑒𝑟𝑠ℎ𝑖𝑝 = = 650,000
75%

Unamortized excess = fair value – equity book value

650,000– (413,500+ 145,500) = 91,000

Allocation of excess of fair value over book value:

Land $25,000
Property 25,500
AP (1,250)
Other Liabilities 250
Remainder to goodwill 39,500
Excess of fair value over book value $91,000
Goodwill = unamortized excess – excess of fv/bv for identifiable net assets
= 91,000– 51,500= 39,500
The elimination entries required for consolidation as of January 1, 2017.

Dr. Cr.
Capital stock- subsidiary 413,500
RE – subsidiary 145,500
Unamortized excess 91,000
Investment in subsidiary 487,500
NCI-Equity 162,500

Dr. Cr.
Account payable 1,250
property 25,500
Land 25,000
Goodwill 39,500
Unamortized excess 91,000
Other liabilities 250

c. The consolidated balance sheet Workpaper as of January 1, 2017.

Subsidiary adjustment
Consolidated
Parent at Book Dr. Cr. balance sheet
value
Cash 11,250 67,750 79,000
Receivable 15,000 35,000 50,000
Land 195,000 100,000 25,000 320,000
Property 375,000 375,000 25,500 775,500
Unamortized excess 91,000 91,000 0
goodwill 39,500 39,500
Investment in Subsidiary 487,500 - 487,500 0
Total assets 1,083,750 577,750 1,264,000

Account payable 6,250 15,000 1,250 20,000

Other liabilities 31,250 3,750 250 35,250
Capital stock 950,000 413,500 413,500 950,000
Retained earnings 96,250 145,500 145,500 96,250
NCI-Equity 162,500 162,500
Total equity and
1,083,750 577,750 1,264,000
liabilities
Print Corporation acquired a 80 percent interest in Summer Corporation on January 1, 2014,
for $240,000, when Summer’s stockholders’ equity was $180,000. On this date, the book value of
Summer’s assets and liabilities was equal to the fair value, except for inventories that were
undervalued by $10,000 and sold in 2014, and plant assets that were undervalued by $20,000 and
had a remaining useful life of 10 years from January 1, and Liabilities were overvalued by 10,000
which was retired in 2014. Summer’s net income and dividends for 2014 were $50,000 and
$10,000, respectively.

Separate-company balance sheet information for Print and Summer Corporations at December 31,
2014, follows (in thousands):

Parent Subsidiary

Cash 50 35
Receivable 30 45
Inventory 110 80
Plant, net 450 100
Investment in Summer 254.4
Total 894.4 260
Liabilities 270 40
Capital stock 200 75
Retained Earnings 424.4 145
Total 894.4 260

Required:
1. Prepare the journal entry on Print Corporation's books to account for the investment in Summer
Inc.
2. Prepare the required elimination entries. Show your computations.
3. Prepare consolidated balance sheet Workpaper for Print Corporation and Subsidiary at
December 31, 2014
Answer
Requirement 1:

Investment in Summer Inc. 240,000

Cash 240,000
Requirement 2:
Preliminary computations

Fair value (purchase price) of 80% interest acquired $240,000

Implied fair value of Summer ($240,000 / 80%) 300,000
Book value of Summer 's net assets (180,000)
Excess fair value over book value acquired = $120,000
Allocation of excess of fair value over book value:
Inventory $10,000
Plant 20,000
Liabilities (10,000)
Remainder to goodwill 80,000
Excess of fair value over book value $120,000
Goodwill = 120,000 – 40,000 = 80,000
Amortization

Identifiable Excess Amortization Balance

Inventory 10,000 10,000 0

Plant, net 20,000 2,000* 18,000
Liabilities 10,000 10,000 0
Goodwill 80,000 0 80,000
excess 120,000 22,000 98,000
*20,000 / 10 years = 2,000

Adjusted net income: Income from subsidiary – amortization = 50,000 -22,000

= 28,000
New Investment
original investment 240,000
Add: adjusted net income (28,000* 80%) 22,400
Less: dividends (10,000*80%) (8,000)
=Investment in subsidiary 254,400

NCI
original amount 300,000 * 20% 60,000
Add: adjusted net income (28,000* 20%) 5,600
Less: dividends (10,000*20%) (2,000)
=NCI 63,600
Elimination Entries:
a Capital Stock 75,000
Retained earnings 145,000
Unamortized excess 98,000

Investment in Summer Inc. 254,400

NCI 63,600
b Plant 18,000
Goodwill 80,000

Unamortized excess 98,000

Requirement 3:
Print Corporation and Subsidiary
Consolidated Balance Sheet Working Paper
at December 31, 2014
Print Summer Adjustments and Consolidated
Eliminations Balance Sheet
Cash $ 50,000 $ 35,000 $ 85,000
Accounts receivable — net 30,000 45,000 75,000
Inventories 110,000 80,000 190,000
Plant assets — net 450,000 100,000 18,000 568,000
Investment in Summer 254,400 254,400 0
Goodwill 80,000 80,000
Unamortized excess 98,000 98,000 0
Assets $894,400 $260,000 $998,000

Liabilities $ 270,000 $ 40,000 $ 310,000

Capital stock 200,000 75,000 75,000 200,000
Retained earnings 424,400 145,000 145,000 424,400
NCI 63,600 63,600
Liabilities & Equity $894,400 $260,000 $998,000

 Pat Corporation paid $5,000,000 for Saw Corporation’s voting common stock on January 2,
2011, and Saw was dissolved. The purchase price consisted of 100,000 shares of Pat’s common
stock with a market value of $4,000,000, plus $1,000,000 cash. Balance sheet information for the
companies immediately before the acquisition is summarized as follows (in thousands):

Required: Prepare the Balance sheet of the parent company immediately after acquisition.
 Answer
Acquisition entry:
Investment in Subsidiary 5,000,000
Capital stock, $10 par 100,000* 10 1,000,000
Other paid-in capital 4,000,000 – 1,000,000 3,000,000
Cash 1,000,000

Pat Corporation
Balance Sheet
at January 2, 2011
(after Acquisition)
Assets
Cash $ 5,000,000
Accounts receivable — net 2,600,000
Notes receivable — net 3,000,000
Inventories 5,000,000
Other current assets 1,400,000
Land 4,000,000
Buildings — net 18,000,000
Equipment — net 20,000,000
Investment in Subsidiary 5,000,000
Total assets $64,000,000

Liabilities and Stockholders’ Equity

Liabilities
Accounts payable $ 2,000,000
Mortgage payable, 10% 10,000,000

Stockholders’ Equity
Capital stock, $10 par $21,000,000
Other paid-in capital 19,000,000
Retained earnings 12,000,000
Total liabilities and stockholders’ equity $64,000,000
 On July 1, 2014, Pixar Corporation issued 46,000 shares of its own $2 par value common stock
for 80,000 shares of the outstanding stock of Sadco Inc. in an acquisition. Pixar common stock at
July 1, 2014 was selling at $16 per share. Just before the business combination, balance sheet
information of the two corporations was as follows:

Pixar Sadco Sadco

Book Book Fair
Value Value Value
Cash $50,000 $34,000 $34,000
Inventories 110,000 84,000 94,000
Other current assets 220,000 80,000 60,000
Land 200,000 90,000 70,000
Plant and equipment-net 1,320,000 440,000 560,000
$1,900,000 $728,000 $818,000

Liabilities $440,000 $140,000 $150,000

Capital stock, $2 par value 1,000,000 200,000
Additional paid-in capital 340,000 180,000
Retained earnings 120,000 208,000
$1,900,000 $728,000

Required:
1. Prepare the journal entry on Pixar Corporation’s books to account for the investment in Sadco
Inc.
2. Calculate the parent's percentage of ownership in Sadco Company.
3. Calculate the excess of fair value over book value and the allocation of the excess
4. Prepare the required elimination entries.
5. Prepare a consolidated balance sheet Workpaper for Pixar Corporation and Subsidiary
immediately after the business combination.
Answer
Requirement 1:
Investment in Sadco Inc. 46,000 *16 736,000
Capital stock 46,000 * 2 92,000
Additional paid-in capital 46,000*14 644,000

Requirement 2:
Sadco stock outstanding $200,000
$200,000 / $2 par value = 100,000 shares o/s

Parent’s percentage of ownership: 80,000 purchased / 100,000 =80%

Requirement 3:
Fair value (purchase price) of 80% interest acquired $736,000
Implied fair value of Sadco ($736,000 / 80%) 920,000
Book value of Sadco’s net assets (588,000)
Excess of fair value over book value acquired = $332,000
Allocation of excess of fair value over book value:
Inventory $10,000
Other current assets (20,000)
Land (20,000)
Plant and Equipment 120,000
Liabilities 10,000
Remainder to goodwill 252,000
Excess of fair value over book value $332,000

a Capital Stock 200,000

Additional paid-in capital 180,000
Retained earnings 208,000
Unamortized excess 332,000
Investment in Sadco Inc. 736,000
NCI-Equity 920,000 x 20 % 184,000
b Inventory 10,000
Plant 120,000
Goodwill 252,000
Other current assets. 20,000
Land 20,000
Liabilities 10,000
Unamortized excess 332,000
Requirement 4:
Pixar Corporation and Subsidiary
Consolidated Balance Sheet Working Paper
July 1, 2014
Subsidiary adjustment Consolidated
Description Parent
at Book value Dr. Cr. balance sheet
Cash 50,000 34,000 84,000
Inventories 110,000 84,000 10,000 204,000
Other c. Assets 220,000 80,000 20,000 280,000
Land 200,000 90,000 20,000 270,000
Plant 1,320,000 440,000 120,000 1,880,000
Unamortized Excess 332,000 332,000 0
goodwill 252,000 252,000
Investment in Subsidiary 736,000 736,000 0
Total assets 2,970,000

Liabilities 440,000 140,000 10,000 590,000

Capital stock 1,092,000 200,000 200,000 1,092,000
Additional paid-in capital 984,000 180,000 180,000 984,000
Retained earnings 120,000 208,000 208,000 120,000
NCI-Equity 184,000 184,000
Total equity and liabilities 2,970,000
➏ North Hills Corporation has acquired 80% of Midland Company’s stock for $520,000 on
January 1st, 2017, when Sail Equity consisted of $450,000 capital stock and $150,000 retained
earnings.
 Midland had a net income of $30,000 and had distributed cash dividends of $10,000 which
was recorded as payable by the subsidiary.
 Any difference between book and fair value will be assigned to the patent with a useful life
of 10 years.
 Separate Company financial statements for the year ended December 31, 2017 for North
Hills Corporation and its Subsidiary Midland Company are provided below:

Parent Subsidiary
Cash 60,000 20,000
Account receivable - customers 440,000 180,000
Dividends receivable from Midland 8,000 -
Inventories 70,000 320,000
Land 100,000 140,000
Plant asset- net 400,000 150,000
Investment in Midland 532,000 -
Total assets 1,610,000 810,000
Account payable- suppliers 287,000 80,000
Account payable 10,000 -
Dividends payable 50,000 10,000
Long-term debt 220,000 100,000
Capital stock 801,000 450,000
Retained earning 242,000 170,000
Total equity and liabilities 1,610,000 810,000
Required Using Equity method:
a. Calculate the patent that was raised from the business combination.
b. Record the parent entries for the following:
 The entry for acquisition of the subsidiary on January 1, 2014
 The entry for recording the income from subsidiary
 The entry for recording the dividends of the subsidiary
c. Record the elimination entries required for consolidation
Answer
a. Calculate the patent which was raised from the business combination.

𝑎𝑚𝑜𝑢𝑛𝑡 𝑝𝑎𝑖𝑑 520,000

FV= % 𝑜𝑤𝑛𝑒𝑟𝑠ℎ𝑖𝑝 = = 650,000
80%
Excess = fair value – book value = 650,000 – 600,000 = 50,000
Patent = 50,000
50,000
Amortization of patent = = 5,000
10
 b. Record the parent entries for the following:
 The entry for acquisition of the subsidiary on January 1, 2014
Dr Cr
Investment in subsidiary 520,000
Cash 520,000
 The entry for recording the income from subsidiary
Dr Cr
Investment in subsidiary ( 30,000-5,000) *80% 20,000
Income from subsidiary 20,000
 The entry for recording the dividends of the subsidiary
Dr Cr
Dividends receivable (10,000*80%) 8,000
Investment in subsidiary 8,000
c. Record the elimination entries required for consolidation
1.Eliminating income – parent
Dr Cr
income from subsidiary (30,000-5,000) 80% 20,000
Dividends (80%* 10,000) 8,000
Investment in subsidiary (remaining) 12,000
2.Eliminating income – nci
Dr Cr
NCI- income (30,000-5,000)*20% 5000
Dividends (20%* 10,000) 2,000
NCI – equity (remaining) 3000
3.Eliminating investment and equity balance
Dr Cr
retained earnings (beginning ) 150,000
capital stock- subsidiary 450,000
Patent 50,000
Investment in subsidiary 520,000
NCI-Equity (650,000*20%) 130,000
4.Amortization entry
Dr Cr
Amortization expense 50,000/10 5,000
patent 5,000
5.Reciprocal accounts
Dr Cr
Dividends Payable 8,000
Dividends receivable 8,000
❼ Palermo Corporation pays $88,000 for 80 percent of the outstanding voting stock of Sag
Corporation on January 1, 2011, when Sag Corporation’s stockholders’ equity consists of $60,000
capital stock and $30,000 retained earnings. The excess of fair value over book value will be
assigned to the patent with a 10-year amortization period. Sag’s net income and dividends are as
follows:

2011 2012
Net income $25,000 $30,000
dividends 15,000 15,000

Required: Using Equity Method

1. Prepare the journal entry on Palermo Corporation's books to account for the investment in Sag
Inc.
2. Calculate the amount that will be assigned to patent.
3. Prepare the required elimination entries in 2011
4. Calculate the Investment amount of the parent and Non-controlling interest in the subsidiary at
the end of 2011 and 2012.

ANSWER
Requirement 1:

Investment in Sag Inc. 88,000

Cash 88,000

Requirement 2

Fair value (purchase price) of 80% interest acquired $88,000

Implied fair value of Sag ($88,000 / 80%) 110,000
Book value of Sag net assets (90,000)
Excess fair value over book value acquired = $20,000

Patent = 20,000

Annual amortization of patent = 20,000 / 10 years = 2,000 / year

Requirement 3

Elimination entries
1. Eliminating income – parent
Dr. Cr.
Income from subsidiary (25,000- 2,000) 80% 18,400
Dividends (80%* 15,000) 12,000
Investment in subsidiary (remaining) 6,400
 2. Eliminating income – non controlling
Dr. Cr.
NCI- income (25,000- 2,000) 20% 4,600
Dividends (20%* 15,000) 3,000
NCI – Equity (remaining) 1,600
*NCI income should be calculated = (net income –amortization)* %

3. Eliminating investment and equity balance

Dr. Cr.
capital stock- subsidiary 60,000
retained earnings (beginning ) 30,000
Patent 20,000
Investment in subsidiary 88,000
NCI-Equity ( 110,000*20%) 22,000

4. Amortization entry
Dr. Cr.
Amortization expense (20,000/10) 2,000
Patent 2,000

Requirement 4:

New Investment
2011 2012
Original investment 88,000 94,400
Add: adjusted net income
(25,000 – 2000)*80 % 18,400
(30,000 – 2000)*80 % 22,400
Less: Dividends
15,000* 80% (12,000)
15,000* 80% (12,000)
= New Investment 94,400 104,800

New NCI
2011 2012
Original amount 22,000 23,600
Add: adjusted net income
(25,000 – 2000)*20 % 4,600
(30,000 – 2000)*20 % 5,600
Less: Dividends
15,000* 20% (3,000)
15,000* 20% (3,000)
= New NCI 23,600 26,200
❽ Milt Corporation has acquired 80% AutoCAD company stock for $700,000 on January 1, 2015,
when Subsidiary Equity consist of $450,000 capital stock and $200,000 retained earnings.
 Subsidiary had net income of 200,000 and had distributed cash dividends of $60,000 which
was recorded as payable by the subsidiary.
 In time of acquisition a building was undervalued by $150,000, the building has useful life
of 10 years.
 Any difference between book and fair value above the 150,000 will be assigned to goodwill.
 Separate Company financial statements for the year ended December 31, 2015 for parent
and its Subsidiary provided below:
Parent Subsidiary
Incomes statement and retained earnings 31, Dec 2015
Sales $500,000 $280,000
Income from Subsidiary $92,000 -
Cost of goods sold ($250,000) ($50,000)
Operating expenses ($100,600) ($30,000)
Net income $241,400 $200,000
Add: retained earnings, 1 Jan 2015 $61,000 $200,000
Less: dividends ($50,000) ($60,000)
Retained earnings 31 Dec. 2015 $252,400 $340,000
Balance sheet 31, Dec 2015
Cash $17, 200 $435,000
Receivable – net $60,000 $240,000
Dividends receivable form Subsidiary $48,000 -
building $79,500 $185,000
Investment in Subsidiary 800,000 -
Total assets $987,500 $860,000
Account payable $89,200 $10,000
Dividends Payable - $60,000
Capital stock $645,900 $450,000
Retained earnings $252,400 $340,000
Total equity and liabilities $987,500 $860,000
Calculate the following
o Is there any goodwill raised from the business combination. If yes what is the amount of
goodwill.
o Record the parent entries for the following:
o The entry for acquisition of the subsidiary on January 1, 2015
o The entry for recording the income from subsidiary
o The entry for recording the dividends of the subsidiary
o Record the elimination entries required for consolidation
o Calculate the investment amount for the parent and the NCI as of 1 January 2016.
 Answer
o Goodwill:

𝑎𝑚𝑜𝑢𝑛𝑡 𝑝𝑎𝑖𝑑 700,000

FV= % 𝑜𝑤𝑛𝑒𝑟𝑠ℎ𝑖𝑝 = = 875,000
80%

Unamortized excess = fair value – book value = 875,000 – (200,000+ 450,000) = 225,000

Allocation of excess of fair value over book value:

Building $150,000
Remainder to goodwill 75,000
Excess of fair value over book value $225,000

Goodwill= 225,000-150,000= 75,000

150,000
Amortization of Building = = 15,000
10

o The parent entries for the following

o The entry for acquisition of the subsidiary on January 1, 2015

Dr Cr
Investment in subsidiary 700,000
Cash 700,000

o The entry for recording the income from subsidiary

Dr Cr
Investment in subsidiary ( 200,000-15,000) *80% 148,000
Income from subsidiary 148,000

o The entry for recording the dividends of the subsidiary

Dr Cr
Dividends receivable (60,000*80%) 48,000
Investment in subsidiary 48,000

o The elimination entries required for consolidation

1. Eliminating income – parent

Dr Cr
income from subsidiary ( 200,000-15,000) *80% 148,000
Dividends 60,000*80%)) 48,000
Investment in subsidiary (remaining) 100,000
 2. Eliminating income – NCI
Dr Cr
NCI- income ( 200,000-15,000) *20% 37,000
Dividends (60,000*20%) 12,000
NCI – equity (remaining) 25,000

3. Eliminating investment and equity balances

Dr Cr
retained earnings (beginning ) 200,000
capital stock- subsidiary 450,000
Unamortized excess 225,000
Investment in subsidiary (875,000*80%) 700,000
NCI-Equity (875,000*20%) 175,000

4. Unamortized excess
Dr Cr
building 150,000
goodwill 75,000
Unamortized excess 225,000

5. Amortization entry
Dr Cr
Amortization expense (150,000/10) 15,000
Building 15,000

6. Dividends payable / receivable

Dr Cr
Dividends payable 48,000
Dividends receivable 48,000

o Calculate the investment amount for the parent and the NCI as of 1 January 2016.

Investment
Original investment 700,000
Add: net income 148,000
Less : Dividends (48,000)
= new investment amount 800,000

NCI
Original amount 175,000
Add: net income 37,000
Less : Dividends (12,000)
= new NCI 200,000
❾ Orange Corporation has acquired 60% of Pink Company stock for $900,000 on January1,
2017, when Pink Equity consist of $450,000 capital stock and $200,000 retained earnings.
 Subsidiary had net income of 300,000 and had distributed cash dividends of $35,000
which was recorded as payable by the subsidiary.
 Subsidiary Building was undervalued by $700,000 in time acquisition.
 Any excess differential above the $700,000 which was mentioned above should be
allocated to Goodwill.
 The Building has useful life of 10 years

 Separate Company financial statements for the year ended December 31, 2017 for parent
and its Subsidiary provided below:
Parent Subsidiary
Incomes statement and retained earnings 31, Dec 2017
Sales $900,000 $480,000
Income from Subsidiary $133,440 -
Cost of goods sold ($290,000) ($150,000)
Operating expenses ($100,600) ($30,000)
Net income $642,840 $300,000
Add: retained earnings, 1 Jan 2017 $61,000 $200,000
Less: dividends ($50,000) ($35,000)
Retained earnings 31 Dec. 2017 $653,840 $465,000
Balance sheet 31, Dec 2017
Cash $17, 200 $430,000
Receivable – net $60,000 $275,000
Dividends receivable form Subsidiary $21,000 -
Building $80,940 $255,000
Investment in Subsidiary $1,059,000 -
Total assets 1,220,940 960,000
Account payable $104,200 $10,000
Dividends Payable - $35,000
Capital stock $462,900 $450,000
Retained earnings $653,840 $465,000
Total equity and liabilities $1,220,940 $960,000
Use Equity method to calculate the following
o Calculate the following:
o unamortized excess amount and
o the amount to be allocated to the goodwill
o Calculate the adjusted income from subsidiary for
o the parent and
o the NCI
o Record the elimination entries required
Answer
o unamortized excess amount and the amount to be allocated to the goodwill
Fair value = 900,000 / 60% = 1,500,000
Unamortized Excess = 1,500,000– 650,000 = 850,000
Allocation of excess of fair value over book value:
Building $700,000
Remainder to goodwill 150,000
Excess of fair value over book value $850,000
Goodwill= 850,000-700,000= 150,000
o The adjusted income from subsidiary for the parent and the NCI
Parent adjusted income
Add: Subsidiary net income (300,000 * 60%) 180,000
Less: Amortize of excess amount – building (700,000 / 10 * 60%) 42,000
=Adjusted income 138,000

NCI adjusted income

Add: Subsidiary net income (300,000 * 40%) 120,000
Less: Amortize of excess amount –building (700,000 / 10 * 40%) 28,000
=Adjusted income 92,000
o The elimination entries:
Elimination of subsidiary income - Parent
Dr. Income from subsidiary 138,000
Cr. Dividends 21,000
Cr. Investment in subsidiary 117,000
Elimination of subsidiary income - NCI
Dr. NCI-income 92,000
Cr. Dividends 14,000
Cr. NCI-equity 78,000
Elimination on Investment and Equity
Dr. Retained earnings 200,000
Dr. Capital stock 450,000
Dr. Unamortized excess in asset 850,000
Cr. Investment in subsidiary 900,000
Cr. NCI 600,000
Allocation of unamortized excess
Dr. building 700,000
Dr. Goodwill 150,000
Cr. Unamortized excess in asset 850,000
Amortization of building
Dr. Depreciation Expense 70,000
Cr. building 70,000
Reciprocal accounts
Dr. Dividends payable 21,000
Cr. Dividends receivable 21,000
❿ Mark Corporation has acquired 88% of John Company stock for $616,000 on January 1, 2017,
when John Equity consist of $450,000 capital stock and $200,000 retained earnings.
 The subsidiary had a net income of $200,000 and had distributed cash dividends of $30,000
which was recorded as payable.
 Any difference between book and fair value will be assigned to patent with a useful life of
10 years.
 Separate Company financial statements for the year ended December 31, 2017 for parent
and its Subsidiary are provided below:

Parent Subsidiary
Incomes statement and retained earnings 31, Dec 2017
Sales $500,000 $450,000
Income from Subsidiary $132,000 -
Cost of goods sold ($250,000) ($240,000)
Operating expenses ($100,600) ($10,000)
Net income $281,400 $200,000
Add: retained earnings, 1 Jan 2017 $61,000 $200,000
Less: dividends ($50,000) ($30,000)
Retained earnings 31 Dec. 2017 $292,400 $370,000
Balance sheet 31, Dec 2017
Cash $38, 560 $435,000
Receivable – net $60,000 $240,000
Dividends receivable form Subsidiary $26,400 -
Inventories $80,940 $185,000
Investment in Subsidiary $765,600 -
Total assets 932,940 860,000
Account payable $177,640 $10,000
Dividends Payable - $30,000
Capital stock $462,900 $450,000
Retained earnings $292,400 $370,000
Total equity and liabilities $932,940 $860,000
Required:
a. Is there any patent raised from the business combination? If yes compute the
amount of patent.
b. Record the parent entries for the following:
 The entry for acquisition of the subsidiary on January 1, 2017
 The entry for recording the income from subsidiary
 The entry for recording the dividends of the subsidiary
c. Record the elimination entries required for consolidation
d. Calculate the investment amount for the parent and the NCI as of 1 January 2018.
 Answer
a. Patent:
𝑎𝑚𝑜𝑢𝑛𝑡 𝑝𝑎𝑖𝑑 616,000
FV= % 𝑜𝑤𝑛𝑒𝑟𝑠ℎ𝑖𝑝 = = 700,000
88%
Excess = fair value – book value = 700,000 – (200,000+ 450,000) = 50,000
Patent = 50,000
50,000
Amortization of patent = = 5,000
10
b. The parent entries:
 The entry for acquisition of the subsidiary on January 1, 2015
Dr Cr
Investment in subsidiary 616,000
Cash 616,000
 The entry for recording the income from subsidiary
Dr Cr
Investment in subsidiary ( 200,000- 5,000) *88% 171,600
Income from subsidiary 171,600
 The entry for recording the dividends of the subsidiary
Dr Cr
Dividends receivable (30,000*88%) 26,400
Investment in subsidiary 26,400
c. The elimination entries required for consolidation

1. Eliminating income – parent

Dr Cr
income from subsidiary ( 200,000- 5,000) *88% 171,600
Dividends (30,000*88%)) 26,400
Investment in subsidiary (remaining) 145,200

2. Eliminating income – NCI

Dr Cr
NCI- income ( 200,000- 5,000) *12% 23,400
Dividends (30,000*12%) 3,600
NCI – equity (remaining) 19,800

3. Eliminating investment and equity balance

Dr Cr
retained earnings (beginning ) 200,000
capital stock- subsidiary 450,000
Patent 50,000
Investment in subsidiary (700,000*88%) 616,000
NCI-Equity (700,000*12%) 84,000
 4. Amortization entry
Dr Cr
Amortization expense (50,000/10) 5,000
patent 5,000

5. Dividends payable / receivable

Dr Cr
Dividends payable 26,400
Dividends receivable 26,400

d. Calculate the investment amount for the parent and the NCI as of 1 January 2018.
Investment
Original investment 616,000
Add: net income 176,000
Less : Dividends 26,400
= new investment amount 765,600

NCI
Original amount 84,000
Add: net income 24,000
Less : Dividends 3,600
= new NCI 104,400
⓫ Pat pays $360,000 for 90% of Sol on 12/31/2011 when Sol's equity consisted of $200,000
capital stock and $50,000 retained earnings.
Inventory (sold in 2012), land, and buildings (20 years) were undervalued by $10,000, $30,000,
and $80,000, respectively. Equipment (10 years) was overvalued by $20,000.
Sol's income and dividends for 2012 were $60,000 and $20,000.
At year-end, Sol has dividends payable of $10,000, which Pat has not yet recorded. There is
also $20,000 cash in transit from Sol to Pat for the note receivable not recorded by Pat.
Required:
Using equity method, Prepare the required elimination entries in 2012. Show your computations
Answer

Fair value of the net asset= acquisition price / parent ownership %

= 360,000/90% = 400,000
Unamortized excess = fair value of net asset – Book value of net asset
= 400,000- (200,000+50,000) = 150,000
Descriptions Amount
Inventory 10
Land 30
Building 80
Equipment (20)
Total 100
Goodwill= 150,000-100,000 = 50,000
Amortization expense
Descriptions Balance 31/12/2011 Amortization Balance 31/12/2012
Inventory 10,000 (10,000) -
Land 30,000 - 30,000
Building 80,000 80,000/20= (4000) 76,000
Equipment (20,000) 20,000/10= 2,000 (18,000)
Goodwill 50,000 - 50,000
Total 150,000 12,000 138,000
Elimination entries
1. Adjusting the error
a. recording the dividends which not recoded by the parent
Dr Cr
Dividends receivable (10,000* 90%) 9,000
Investment in subsidiary 9,000

b. cash in transit from Sol to Pat for the note.

Dr Cr
Cash 20,000
Notes receivable 20,000

2. Eliminate reciprocal Investment & subsidiary's equity balances (With

unamortized excess)
Dr Cr
retained earnings (beginning ) 50,000
capital stock- subsidiary 200,000
Unamortized excess 150,000
Investment in subsidiary (beg FV*%) 360,000
NCI-Equity ( beg FV*%) 40,000
 3. Allocate the unamortized excess
Dr Cr
Inventory 10,000
Land 30,000
building 80,000
Goodwill 50,000
Equipment 20,000
Unamortized excess 150,000
4. Eliminate income & dividends from subsidiary. and bring Investment account
to its beginning balance
Dr Cr
income from subsidiary (60,000-12,000)*90% 43,200
Dividends (90%*20,000) 18,000
Investment in subsidiary (remaining) 25,200
*Income from subsidiary should be calculated = (net income –amortization)* %

5. Record non-controlling interest in subsidiaries’ Net Income & dividends

Dr Cr
NCI- income (60,000-12,000)*10% 4,800
Dividends (10%*20,000) 2,000
NCI – equity (remaining) 2,800
*NCI income should be calculated = (net income –Dividends)* %

6. Amortize fair value/book value differentials :Amortization entries

a. Inventory
Dr Cr
Cost of goods sold 10,000
inventory 10,000

b.Building
Dr Cr
Depreciation exp 4,000
building 4,000

c. Equipment
Dr Cr
Equipment 2,000
Depreciation exp 2,000

7. Elimination of other reciprocal accounts

Dr Cr
Dividends payable (10,000*90%) 9,000
Dividends receivable 9,000
⓬ Par Corporation acquired a 70 percent interest in Sol Corporation’s common stock on January
1, 2011, for $245,000 cash. The stockholders’ equity of Sol on this date consisted of $250,000
capital stock and $50,000 retained earnings. The difference between the fair value of Sol and the
underlying equity acquired in Sol was assigned $2,500 to Sol’s undervalued inventory, $7,000 to
undervalued buildings, $10,500 to undervalued equipment, and $30,000 to goodwill.

The undervalued inventory items were sold during 2011, and the undervalued buildings and
equipment had remaining useful lives of seven years and three years, respectively. Depreciation is
straight line. Sol’s net income and dividends for 2011 are as follows: Net Income $50,000,
Dividends $25,000

Required: Using equity method

Prepare the required elimination entries in 2011; Show your computations (Excess of fair value
over book value, allocation of excess, and amortization)

Answer
Supporting computations

Fair value ( purchase price) $245,000

Implied fair value of Syn ($245,000 / 70%) $350,000
Book value of SOL net assets (300,000)
Excess of fair value over book value $50,000

Excess allocated to
Inventory $ 2,500
Building 7,000
equipment 10,500
Remainder to goodwill 30,000
Excess fair value over book value $ 50,000

Amortization

Descriptions Balance Amortization Balance

1/1/2011 31/12/2011
Inventory 2,500 (2,500) -
Building 7,000 7,000/7= (1000) 6,000
Equipment 10,500 10,500/3= (3,500) 7,000
Goodwill 30,000 - 30,000
Total 50,000 7,000 43,000
Elimination entries
1. Eliminating income – parent
Dr Cr
Income from Subsidiary (50,000-7,000)*70% 30,100
Dividends (70%*25,000) 17,500
Investment in Subsidiary (remaining) 12,600
*Income from subsidiary should be calculated = (net income –amortization)* %
2. Eliminating income – non controlling
Dr Cr
NCI- income (50,000-7,000)*30% 12,900
Dividends (30%*25,000) 7,500
NCI – equity (remaining) 5,400

3. Eliminating investment and equity balance

Dr Cr
Capital stock (Sol) 250,000
Retained earnings (Sol) - January 1 50,000
Unamortized excess 50,000
Investment in Subsidiary 350,000 * 70% 245,000
NCI –Equity January 1 350,000 * 30% 105,000
4. Assigning unamortized excess
Dr Cr
Inventory 2,500
Building 7,000
Equipment 10,500
Goodwill 30,000
Unamortized excess 50,000
5. Recording Amortization expenses
d. Inventory
Dr Cr
Cost of goods sold 2,500
Inventory 2,500

e. Building
Dr Cr
Depreciation exp. –building 1,000
Building 1,000
f. Equipment
Dr Cr
Depreciation exp. –Equipment 3,500
Equipment 3,500