Question

4. On January 1, 2009, Rand Corp, issued shares of its common stock to acquire all of the outstanding common stock of Spaulding Inc. Spaulding Inc's book value was only $140,000 at the time, but Rand Corp issued 12,000 shares having a par value of S1 per share and a fair value of $20 per share. Rand Corp was willing to convey these shares because it felt that buildings (10-year life) were undervalued on Ss records by $60,000 while equipment (five-year life) was undervalued by $25,000. Any consideration transferred over fair value of identified net assets acquired is assigned to goodwill. The Trial Balances for Rand Corp and Spalding Inc as of December 31, 2012 are presented below: Spaulding Revenues Expenses Equity in subsidiary earnings Net income Rand Corp $ 372.000 (264,000) 25.000 S 133.000 S108.000 (72.000) 0 $36.000 Retained earnings. January 1, 2012 Net income (above) Dividends paid Retained earnings. December 31, 2012 $ 765,000 133.000 (84.000 $ 814.000 $102.000 36.000 24,000 SULO Current assets Investment in Spaulding Inc Buildings (net) Equipment (net) Total assets $ 150.000 242.000 525.000 389 250 S1.306,250 $ 22.000 0 85.000 129.000 $236.000 Liabilities $ 82.250 $ 50.000 Common stock 360,000 72.000 Additional paid in capital 50.000 0 Retained earnings, December 31, 2012 (above) 814,000 114.000 Total liabilities and stockholders' equity $1.306.250 $236.000 Required: Prepare the December 31, 2012 consolidation entries for this business combination assuming the parent uses the: a. Equity method b. What C entry will be on the 2013 consolidation worksheet if R Corp uses the Partial equity method to account for this investment, the initial value method?

Answer 1

Particulars Revenue Expenses Equity in subsidiary earnings Net income Retained earnings January 1, 2012 Net income (Above) Dividend paid Retained earnings December 31, 2012 CONSOLIDATED WORKSHEET Rand Spaulding Consolidated Entries Corporation Incorporation Debit Credit $372,000 $108,000 $0 $0 ($264,000) ($72,000) $11,000 (E) $25,000 $0 $25,000 (0) $0 $133,000 $36,000 $0 $0 $765,000 $102,000 $102,000 (S) $0 $133,000 $36,000 $0 $0 ($84,000) ($24,000) $24,000 (D) $814,000 $114,000 Consolidated Balance $480,000 ($347,000) $0 $133,000 $765,000 $133,000 ($84,000) $814,000 $172,000 Current assets Investments in spaulding incorporation $150,000 $242,000 $22,000 $0 $24,000 (D) $174,000 (S) $67,000 (A) $25,000 (0) $85,000 $42,000 (A) $6,000 (E) $129,000 $10,000 (A) $5,000 (E) $15,000 (A) $236,000 $525,000 $389,250 Building (net) Equipment (net) Goodwill Total assets $646,000 $523,250 $15,000 $1,356,250 $1,306,250 Liabilities Common stock Additional paid in capital Retained earnings December 31, 2012 (above) Total liabilities and Stockholders' equity $82,250 $360,000 $50,000 $814,000 $1,306,250 $50,000 $72,000 $72,000 (S) $0 $114,000 $236,000 $132,250 $360,000 $50,000 $814,000 $1,356,250

Workings: Amortization expenses for building Amortization expenses for equipment Total amortization expenses $6,000 ($60,000 / 10 years) $5,000 ($25,000 / 5 years) $11,000 $240,000 (12,000 shares * $20) $140,000 $100,000 Purchase consideration Less: Book value Excess over book value Less: under valued assets: Building Equipment Goodwill (Balancing figure) $60,000 $25,000 $15,000