Question

Top Company obtained 100 percent of Bottom Company’s common stock on January 1, 20X6 by issuing...

Top Company obtained 100 percent of Bottom Company’s common stock on January 1, 20X6 by issuing 12,500 shares of its own common stock, which had a $8 par value and a $20 fair value on that date. Bottom reported a net book value of $150,000 and its shares had a $20 per share fair value on that date. However, some of its plant assets (with a 5-year remaining life) were undervalued by $30,000 in the company’s accounting records. Bottom had also developed a customer list with an estimated fair value of $20,000 and a remaining life of 10 years. Top Company uses the equity-method to account for its investment in Bottom. During 20X6 Top and Bottom reported the following:

Top

Bottom

Net Income

$300,000

$290,000

Dividends Declared

25,000

35,000

Required:

Prepare each of the journal entries on Top’s books related to Top’s investment in Bottom.

Business   Accounting   
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Answer #1

Answer;

Date Accounts Title and Explanation Debit Credit
Jan 01, 20X6 Investment in Bottom 250000
   Common Stock (12,500 Shares @8 per) 100000
   Additional Paid in Capital (12,500 shares @ 12 per) 150000
(To record investment in Bottom Company)
20X6 Investment in Bottom 290000
   Income from Bottom Company 290000
(To record Top's share of Bottom's income)
Cash 35000
   Investment in Bottom 35000
(To record Top's share of Bottom's dividends)
Income from Bottom 8000
   Investment in bottom 8000
(To record amortization of differential)
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