Question

Mortar Corporation acquired 80 percent ownership of Granite Company on January 1, 20X7, for $173,000. At that date, the fair value of the noncontrolling interest was $43,250. On January 1, 2007, Granite's book value for Common Stock was $50,000 & Retained Earnings was $100,000.

Additional info:

On January 1, 20X7, Granite reported Buildings & Equipment with a book value of $150,000 and a fair value of $191,250. Granite’s depreciable assets had an estimated economic life of 11 years on the date of combination. Assume that any goodwill impairment should be recorded as an adjustment in Mortar's equity method accounts along with the differential components. Mortar uses the equity method in accounting for its investment in Granite.

1. Give all journal entries recorded by Mortar with regard to its investment in Granite on the date of the combination, January 1, 2007.

2. Give all eliminating entries needed to prepare a full set of consolidated financial statements immediately following the combination. Show Book value calculations & excess value (differential) calculations.

Answer 1

Solution:

a. Preparing the Journal entries recorded by Mortar with regard to its investment in Granite on the date of the combination, January 1, 2007:

Event	Account Title and Explanation	Debit	Credit
1	Investment in Granite company	$173,000
	Cash		$173,000
	(To Record the entry for purchase of stock)
2	Investment in Granite company	$48,000
	Income from Subsidiary		$48,000
	(To Record the entry for income recognized under equity method, 60,000*80%)
3	Cash	$16,000
	Investment in Granite company		$16,000
	(To Record the entry for dividend received, 20,000*80%)
4	Income from Subsidiary	$3,000
	Investment in Granite company		$3,000
	(Amortization of excess i.e., differential amount:[($191,250 - $150,000) x 80%] / 11 years)

b) Preparing the Consolidation entries needed to prepare a full set of consolidated financial statements for 2007:

Event	Account Title and Explanation	Debit	Credit
1	Income from Subsidiary	$45,000
	Dividends declared		$16,000
	Investment in Granite company		$29,000
2	Income to Non-controlling Interest	$11,250
	Dividends Declared		$4,000
	Non-controlling Interest		$7,250
	(To Record the entry for assigning income to non-controlling interest:$11,250 = [$60,000 – ($41,250 / 11)] x .20)
3	Common Stock — Granite Company	$50,000
	Retained Earnings, January	$100,000
	Differential ($173,000 + $43,250) - $150,000)	$66,250
	Investment in Granite Company		$173,000
	Non-controlling Interest		$43,250
	(To Record the Entry to eliminate beginning investment balance)
4	Goodwill	$25,000
	Building and equipment	$41,250
	Differential		$66,250
	[assigning beginning difference: (191,250- $150,000= $41,250) and (66,250-41,250= 25,000)]
5	Accounts Payable	$16,000
	Accounts Receivable		$16,000
	(To Record the entry to eliminate inter-corporate receivable/payable)
6	Depreciation Expense	$3,750
	Accumulated Depreciation		$3,750
	(Amortizing differential related to depreciable assets: $41,250 / 11 years)