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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.
Expert Answer
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.
