Answer:
Power Corporation
a) Consolidation Entries:
Debit Assets $427,000
Debit Land $25,000
Debit Goodwill $7,000
Credit Inventories $7,000
Credit Liabilities $165,000
Credit Cash Account $287,000
To record the acquisition of Scrub.
b. Consolidation Entries:
Debit Assets $427,000
Debit Land $25,000
Credit Inventories $7,000
Credit Liabilities $165,000
Credit Cash Account $262,000
Credit Negative Goodwill $18,000
To record the acquisition of Scrub.
Step-by-step explanation:
a) Data and Calculations:
Percentage ownership of Scrub by Power = 100%
Assets of Scrub = $427,000
Liabilities of Scrub 165,000
Common stock 85,000
Retained earnings 177,000
Total Liab + Equity $427,000
On acquisition:
Assets revalued to $445,000 ($427,000 + 25,000 - 7,000)
Liabilities 165,000
Net fair value of assets $280,000
a) Purchase price $287,000
Goodwill on acquisition $7,000
b) Net fair value of assets $280,000
Purchase price 262,000
Negative Goodwill arising $18,000
c) In the first case, the acquisition transactions involve goodwill because Power Corporation pays a greater purchase price than the net fair value of Scrub Company's tangible assets. But in the second case, negative goodwill occurs because the value of the intangible assets (net fair value of assets exceeds the purchase price) must be recorded as a gain on Power Corporation's income statement.