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 Credit $ 56,700 Debit Accounts payable Accounts receivable Additional paid-in capital Buildings (net) (4-year remaining life) Cash and short-term investments Common stochk Equipment (net) (5-year remaining life) Inventory Land Long-term liabilities (mature 12/31/20) Retained earings, 1/1/17 Supplies 43,800 50,000 143,000 80,250 250,000 295,000 110,500 112,000 171,000 268,750 11,900 $796,450 Totals 796,450 During 2017, Abernethy reported net income of $122,500 while declaring and paying dividends of $15,000. During 2018, Abernethy reported net income of $159,250 while declaring and paying dividends of $49,000 Assume that Chapman Company acquired Abernethy's common stock for $698,050 in cash. As of January 1, 2017, Abernethy's land had a fair value of $123,900, its buildings were valued at $219,400, and its equipment was appraised at $254,500. 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.)

Questions:

1. Prepare entry S to eliminate stockholders' equity accounts of subsidiary.

2. Prepare entry A to recognize allocations attributed to fair value of specific accounts at acquisition date with residual fair value recognized as goodwill.

3. Prepare entry I to eliminate $122,500 income accrual for 2017 less $11,000 amortization recorded by parent using equity method.

4. Prepare entry D to eliminate intra-entity dividend transfers.

5. Prepare entry E to recognize current year amortization expense.

6. Prepare entry S to eliminate beginning stockholders' equity of subsidiary—the Retained Earnings account has been adjusted for 2017 income and dividends. Entry *C is not needed because equity method was applied.

7. Prepare entry A to recognize allocations relating to investment—balances shown here are as of beginning of current year [original allocation less excess amortizations for the prior period].

8. Prepare entry I to eliminate $159,250 income accrual less $11,000 amortization recorded by parent during 2018 using equity method.

9. Prepare entry D to eliminate intra-entity dividend transfers.

10. Prepare entry E to recognize current year amortization expense.

Answer 1

Consolidation Entries for two years using Initial value Method
Consolidation Entries as of December 31, 2017
1) Entry S	Debit	Credit
Common Stock—Abernethy	$250,000
Additional Paid-in Capital	$50,000
Retained Earnings—1/1/17	$268,750
Investment in Abernethy		$568,750
(To eliminate stockholders' equity accounts of subsidiary)
Purchase price allocation and annual excess fair value amortizations
Acquisition date value (consideration paid)	$698,050
Book value	$568,750
Excess price paid over book value (Goodwill)	$129,300
Life assigned to goodwill	indifinetly
Annual excess amortizations	$0.00
2) Entry A
Goodwill	$129,300
Investment in Abernethy		$129,300
(To recognize goodwill portion of the original acquisition fair value)
3) Entry I
Equity in Earnings of Subsidiary	$122,500.00
Investment in Abernethy		$122,500.00
(To eliminate intercompany income accrual for the current year based on the parent's usage of the partial equity method)
4) Entry D
Investment in Abernethy	$15,000.00
Dividends Paid		$15,000.00
(To eliminate intercompany dividend transfers)
5) Entry E—Not needed. Goodwill is not amortized	No Journal Entry
Consolidation Entries as of December 31, 2018
6)
Entry S
Common Stock—Abernethy	$250,000
Additional Paid-in Capital	$50,000
Retained Earnings—1/1/18 ($268750+$122500 -15000)	$376,250
Investment in Abernethy		$676,250
(To eliminate stockholders' equity accounts of subsidiary)
7)
Entry A
Goodwill	$129,300
Investment in Abernethy		$129,300
(To recognize goodwill portion of the original acquisition fair value)
8)
Entry I
Equity in Earnings of Subsidiary	$159,250.00
Investment in Abernethy		$159,250.00
(To eliminate intercompany income accrual for the current year based on the parent's usage of the partial equity method)
9)
Investment in Abernethy	$49,000.00
Dividends Paid		$49,000.00
(To eliminate intercompany dividend transfers)
10) Entry E—Not needed. Goodwill is not amortized
No Journal Entry