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C4-3   Negative Retained Earnings Understanding Although Sloan Company had good earnings reports in 20X5 and 20X6, it...

C4-3   Negative Retained Earnings

Understanding

Although Sloan Company had good earnings reports in 20X5 and 20X6, it had a negative retained earnings balance on December 31, 20X6. Jacobs Corporation purchased 100 percent of Sloan’s common stock on January 1, 20X7.

Required

a. Explain how Sloan’s negative retained earnings balance is reflected in the consolidated balance sheet immediately following the acquisition.

b. Explain how the existence of negative retained earnings changes the consolidation worksheet entries.

c. Can goodwill be recorded if Jacobs pays more than book value for Sloan’s shares? Explain.

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Answer #1

a) Sloan's is a full owned subsidary of Jacobs corporation.Negative retained earnings are treated as capital loss as they are existed as on the date of accquisition of Sloan company and they deducted from the reserves and surplus of its parent company i.e, Jacobs corporation.

b) Journal entries for business combination is

net identifiable assets A/c dr xxx

goodwill A/c dr xxx

To bank A/c xxx

To investment A/c xxx

  

c) Goodwill should be recorded if Jacobs pays more than book value for Sloan's shares.

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