Question & Answer: On January 1, 2016, Parent Company purchased all of the common stock of Subsidiary Company for $1,000,000 cash. On that da…..

On January 1, 2016, Parent Company purchased all of the common stock of Subsidiary Company for $1,000,000 cash. On that date, Subsidiary had common stock of $90,000, additional paid-in capital of $270,000, and retained earnings of $420,000. The difference between the cost of the purchase and the book value of Subsidiary’s net assets was at least partly due to under or overvalued assets and liabilities. Inventory was undervalued by $20,000. Land was undervalued by $60,000. Buildings and Equipment were undervalued by $70,000. Bonds Payable was overvalued by $20,000. Any unexplained difference is due to Goodwill. Required: Prepare all necessary entries for a January 1, 2016, consolidated balance sheet.

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Allocate acquisition cost to assets:

Investment Cost                              $1,000,000

Book Value-Net Assets                 $780,000

Excess                                                   $220,000

Allocated as follows:

Land                                                      $60,000

Building                                                $70,000

Inventory                                            $20,000

Bonds payable                                  $20,000

Goodwill                                              $50,000

Total Allocated                                  $220,000

Consolidation Entries:

Common Stock 90,000

Additional paid-in capital              270,000

Retained Earnings 420,000

Equity Investment                           780,000

To eliminate subsidiary’s stockholders ‘equity.

Land 60,000

Building 70,000

Inventory                                            20,000

Bonds Payable 20,000

Goodwill 50,000

Equity Investment                           220,000

To eliminate Equity Investment; bring assets to fair values; with the unallocated cost assigned to goodwill.

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