Question

Plumber Corporation acquired all of Socket Corporation's voting shares on January 1, 20X2, for $482,000. At that time, Socket reported common stock outstanding of $92,000 and retained earnings of $130,000. The book values of Socket's assets and liabilities approximated fair values, except for land, which had a book value of $92,000 and a fair value of $112,000, and buildings, which had a book value of $225,000 and a fair value of $410,000. Land and buildings are the only noncurrent assets that Socket holds.

Required:
a. Compute the amount of goodwill at the date of acquisition Goodwill
b. Prepare the consolidating entry or entries required immediately.

Answer 1

Part a

$55,000

Part b

Debit : Common Stock $92,000

Debit : Retained Earnings $130,000

Debit : Revaluation Reserve ($20+ $185) $205,000

Debit : Goodwill $55,000

Credit : Investment in Subsidiary - Socket Corporation $482,000

Step-by-step explanation:

Goodwill is the excess of Purchase price over the Net Assets Taken over at acquisition date.

The Net Assets taken over can be presented by the Equity of the Investee. That is the sum of Common Stock, Retained Earnings and Revaluation Reserves made to reflect fair value adjustments at acquisition date.

Note how the Revaluation Reserve ended with $205,000 following increase of $20,000 on value of land and $185,000 on value of buildings to reflect fair values.

The elimination journal needs to be prepared at consolidation to eliminate common items as reflected by Part b above.