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:

	Debit			Credit
Accounts payable				$	54,100
Accounts receivable	$	48,500
Additional paid-in capital					50,000
Buildings (net) (4-year remaining life)		130,000
Cash and short-term investments		66,000
Common stock					250,000
Equipment (net) (5-year remaining life)		437,500
Inventory		109,000
Land		89,000
Long-term liabilities (mature 12/31/20)					178,500
Retained earnings, 1/1/17					358,800
Supplies		11,400
Totals	$	891,400		$	891,400

During 2017, Abernethy reported net income of $126,000 while declaring and paying dividends of $16,000. During 2018, Abernethy reported net income of $174,000 while declaring and paying dividends of $49,000.

Assume that Chapman Company acquired Abernethy’s common stock for $773,550 in cash. As of January 1, 2017, Abernethy’s land had a fair value of $104,200, its buildings were valued at $208,800, and its equipment was appraised at $396,500. Chapman uses the equity method for this 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.)

Answer 1

1. Asset Taken Over (Overvalued and Undervalued):-

Land:- 89,000 - 104,200 = 15,200 Overvalued

Building:- 130,000 - 208,800 = 78,800 Overvalued

Equipment:- 437,500 - 396,500 = 41,000 Undervalued

2. Calculation of Goodwill

Description		Amount in $
Purchase Price		773,550
Less: Book Value
Common Stock	250,000
Additional paid in Capital	50,000
Retained Earning 1/1/17	358,800
Total Book Value of Abernethy		658,800
Excess Fair Value Over Book Value		114,750
Allocation of Excess Fair Value over Book Value:
Land	15,200
Building	78,800
Equipment	(41,000)
		53,000
Goodwill (114,750- 53,000)		61,750

3. Calculation of Depreciation Expenses on Excess Value allocated to specified Assets

Assets	Value as on 01/01/17 (A)	Life (B)	Depreciation per year (C= A-B)	Value as on 01/01/18 (A-C)
Land	15,200	-	-	15,200
Building	78,800	4	19,700	59,100
Equipment	(41,000)	5	(8,200)	(32,800)
Goodwill	61,750	-	-	61,750
Total	114,750		11,500	103,250

4. Calculation of Retained Earnings at the end of the year 12/31/2017

Description	Amount
Retained Earnings	358,800
Add: Net Income during the year	126,000
Less: Dividend Paid 2017	(16,000)
Retained Earning 12/31/17	468,800

5. Calculation of Equity Income in Subsidiary

Description	Amount
Year 2017
Income of Abernethy during the year	126,000
Less: Depreciation during the year	(11,500)
Equity Income in Abernethy Income for the year 2017	114,750
Year 2018
Income of Abernethy during the year	174,000
Less: Depreciation during the year	(11,500)
Equity Income in Abernethy Income for the year 2018	162,500

Consolidation Entries as of December 31, 2017
1) Entry S	Debit	Credit
Common Stock	$250,000
Additional Paid-in Capital	$50,000
Retained Earnings—1/1/17	$358,800
Investment in Abernethy		$658,800
2) Entry A
Land	$15,200
Building	$78,800
Goodwill	$61,750
Equipment		$41,000
Investment in Abernethy		$114,750
3) Entry I
Equity income in Abernethy	$114,750
Investment in Abernethy		$114,750
4) Entry D
Investment in Abernethy	$16,000
Dividends Paid		$16,000
(To eliminate intercompany dividend transfers)
5) Entry E
Depreciation Expenses	$11,500
Equipment	$8,200
Building		$19,700
Consolidation Entries as of December 31, 2018
6)
Entry S
Common Stock	$250,000
Additional Paid-in Capital	$50,000
Retained Earnings—1/1/18	$468,800
Investment in Abernethy		$768,800
7)
Entry A
Land	$15,200
Building	$59,100
Goodwill	$61,750
Equipment		$32,800
Investment in Abernethy		$103,250
8)
Entry I
Equity Income	$162,500
Investment in Abernethy		$162,500
9)
Entry D
Investment in Abernethy	$49,000
Dividends Paid		$49,000
10) Entry E
Depreciation Expenses	$11,500
Equipment	$8,200
Building		$19,700

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