Question

On January 1, 2017, Palka, Inc., acquired 70 percent of the outstanding shares of Sellinger Company...

On January 1, 2017, Palka, Inc., acquired 70 percent of the outstanding shares of Sellinger Company for $1,649,200 in cash. The price paid was proportionate to Sellinger’s total fair value, although at the acquisition date, Sellinger had a total book value of $2,100,000. All assets acquired and liabilities assumed had fair values equal to book values except for a patent (six-year remaining life) that was undervalued on Sellinger’s accounting records by $246,000. On January 1, 2018, Palka acquired an additional 25 percent common stock equity interest in Sellinger Company for $586,250 in cash. On its internal records, Palka uses the equity method to account for its shares of Sellinger.

During the two years following the acquisition, Sellinger reported the following net income and dividends:

2017 2018
Net income $ 350,000 $ 515,000
Dividends declared 180,000 220,000

Show Palka’s journal entry to record its January 1, 2018, acquisition of an additional 25 percent ownership of Sellinger Company shares.

Prepare a schedule showing Palka’s December 31, 2018, equity method balance for its Investment in Sellinger account.

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Answer #1

a)

Calculation the fair value using the mathematical Model :-

= n * 0.70 = $1649200

= n * 0.70 / 0.70 = $1649200 / 0.70

n = $1649200 * 0.70

n = $2356000

Amortization of Undervalue Amount divided in Six remaining Year :-

= $246000 / 6

= $41000

Calculation of fair Value :-

= Initial Fair Value + Net Income - Dividends - Amortization

= $2356000 + $350000 - $180000 - $41000

= $2485000

Journal Emtry :-

Particulars Debit($) Credit($)
Investment in Company S A/c Dr. ($2485000*25%) 621250
To Cash A/c 586250
To Additional paid in Capital - Company S ($621250 - $586250) 35000

b) Copmany P's Share of Earnings

= ($350000 - $41000) * 0.70

= $216300

Company P's share of Dividend :-

= $180000 * 0.70

= $126000

Total Interest in Company S

= 0.70 + 0.25

= 0.95

Company P's Share of Earning:-

= ($515000 - $41000) * 0.95

= $450300

Company P's Share of Dividends ;-

= $220000 * 0.95

= $209000

Schedule for the Investment Balance Company P has in Company S :-

Particulars Amount ($)
Fair Value of 2017 Acquisition 1649200
70% of Adjusted Subsidiary Income 216300
70% of 2012 subsidiary Dividends (126000)
Adjusted fair value of 2018 Acquisition 621250
95% of Adjusted Subsidiary Income 450300
95% of 2018 subsidiary dividends (209000)
Investment in Company S 2602050
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