Question

on january 1, 2014, pauline company acquired 90% of stephen company at a cost of $90,000. on january 1, 2014, stephen company acquired 10% of pauline company at a cost of $10, january 1, 2014, the following data is available:stephen company pauline companycommon stock $50,000 common stock $50,000retained earnings $50,000 retained earnings $50,000assets fair value $100,000 assets fair value $100,000assets book value $100,000 assets book value $100,000liabilities $0 liabilities $0at december 31, 2014, the following data is available: january 1, 2014 december 31, 2014on pauline books:investment in stephen $90,000 $105,000on stephen books:investment in pauline $10,000 $10,000 assuming the treasury stock method is used, what elimination entry is needed for the investment in pauline at december 31, 2014?

Answer 1

At December 31, 2014, an elimination entry of $15,000 is needed for the Investment in Pauline on Pauline Company's books.

Step-by-step explanation:

In the consolidation process, intercompany investments and balances need to be eliminated to reflect the economic reality of the combined entity. The Investment in Pauline account on Pauline Company's books needs adjustment. Initially, Pauline Company recognized the investment at the cost of acquisition, which was $90,000.

However, the fair value of the 90% acquired by Pauline Company increased from $90,000 to $105,000 by the end of December 31, 2014. The adjustment is made by eliminating the difference between the original cost and the fair value at the acquisition date. The elimination entry, therefore, is $105,000 (fair value at December 31, 2014) - $90,000 (original cost) = $15,000.

This adjustment ensures that Pauline Company's books accurately reflect the increased value of the investment in Stephen Company. The Treasury Stock Method is not directly relevant in this case since it is typically used to calculate the impact of stock options on diluted earnings per share, and it involves assumed repurchases of stock, which is not the situation here. Instead, the adjustment is straightforward, accounting for the change in the fair value of the investment over time.

In summary, the elimination entry of $15,000 for the Investment in Pauline at December 31, 2014, rectifies the initial recorded cost to reflect the updated fair value of the investment on Pauline Company's books after the acquisition.