Question

On January 1, 2017, Gardner, Inc. acquired 100 percent of the common stock of Drake Company for $760,000 in cash and other fair-value consideration. Gardner Company fair value was allocated among its net assets as follows:

The December 31, 2018 trial balance for the parent and subsidiary follows:

Fair value of consideration transferred for Drake Company		$760,000
Book value of Drake Company
Common stock an APIC	$130,000
Retained Earnings	$370,000	$500,000
Excess Fair value over book value to:
Trademark (10-year remaining)	$40,000
Existing Technology (5-year remaining)	80,000	120,000
Goodwill		$140,000

	Gardner Inc.	Drake Company
Revenues	$(990,000)	$(210,000)
Cost of Goods Sold	500,000	90,000
Depreciation Expense	100,000	5,000
Amortization Expense	55,000	18,000
Dividend Income	$(40,000)	0
Net Income	$(375,000)	$(97,000)
Retained Earnings, 1/1	$(1,555,000)	$(450,000)
Net Income	(375,000)	(97,000)
Dividends Paid	250,000	40,000
Retained Earnings 12/31	$(1,6880,000)	$(507,000)
Current Assets	$870,000	$355,000
Investment in Drake	760,000
Equipment (Net)	765,000	225,000
Trademark	235,000	100,000
Existing Technology	0	45,000
Goodwill	450,000	0
Total Assets	$3,080,000	$725,000
Liabilities	$(780,000)	$(88,000)
Common Stock	(500,000)	(100,000)
Additional paid-in-capital	(120,000)	(30,000)
Retained Earnings 12/31	(1,680,000)	(507,000)
Total Liabilities & Equity	$(3,080,000)	$(725,000)

(1)    Prepare a brief explanation, including evidence, of which accounting method is being used by the parent company. If it is determined that the method is Initial Value, explain the calculation to obtain the *C entry.

(2)    Using Excel, prepare a worksheet to compute the consolidated balances for Gardner & Drake.

Answer 1

Acquisition accounting method

Acquisition accounting method is used by the parent comany. This is because the acquisition is currently recorded at fair value of net assets acquired, any incremental amount paid being recorded at goodwill. The entity has also identified fair values of assets which are not recorded in subsidiary books. Therefore, the accounting method used here is acquisition accounting method. Worksheet for consolidated balances as follows, first sheet with formula, second with final solution: