Question

Matthews Co. acquired all of the common stock of Jackson Co. on January 1, 2012. As of that date, Jackson had the following trial balance:

Debit Credit
Accounts payable $60,000
Accounts receivable $50,000
Additional paid - in capital 60,000
Buildings - net (20 -year life) 140,000
Cash and short-term investments 70,000
Common stock 300,000
Equipment - net (8-year life) 240,000
Inventory 110,000
Land 90,000
Long-term liabilities (mature 12/31/14) 180,000
Retained earnings, 1/1/12 120,000
Supplies 20,000
Totals $720,000 $720,000
During 2012, Jackson reported net income of $96,000 while paying dividends of $12,000. During 2012, Jackson reported net income of $132,000 while paying dividends of $36,000.

Assume that Matthews Co. acquired the common stock of Jackson Co. for $588,000 in cash. As of January 1, 2012, Jackson's land had a fair value of $102,000, its building were valued at $188,000, and its equipment was appraised at $216,000. Any excess consideration transferred over fair value of assets and liabilities acquired is due to an unrecorded patent to be amortized over 10 years. Matthews decided to use the equity method for this investment.

//Required

1. Prepare Excess Allocation Worksheet/Amortization Calculations for date of acquisition.

2. Prepare consolidation worksheet journal entries for December 31,2012 and December 31, 2013.

3. Prepare consolidation worksheet for December 31, 2013 only - either balance sheet only or balance sheet and retained earnings statement. (See next page for 12/31/13 financial information for both companies.)

December 31, 2913 Financials Matthews Jackson
Cash 185,000 105,000
Accounts Receivable 225,000 175,000
Inventory 175,000 145,000
Supplies - 30,000
Buildings 474,000 135,000
Equipment 925,000 210,000
Land 90,000
Investment in Jackson 754,800
Patent
Total 2,738,800 890,000
Accounts payable 175,000 65,000
Long-term liabiliies 771,000 165,000
Common stok ($1 par value 100,000 300,000
Additional paid-in capital 300,00 60,000
Retained earnings 1,392,800 300,000
Total 2,738,800 890,000

Answer 1

The question relates to the financial consolidation process when a parent company acquires a subsidiary. The response provides detailed steps to calculate excess allocation and worksheet amortization, prepare consolidation worksheet journal entries, and create a consolidation worksheet as of December 31, 2013.

Step-by-step explanation:

Excess Allocation and Worksheet Amortization Calculations

To begin with, we need to allocate the excess purchase price over the fair value of the net assets acquired. Matthews Co. paid $588,000 for Jackson Co., whose assets and liabilities have different fair values from the book values. We will calculate the excess amount that is due to an unrecorded patent, which will be amortized over ten years.

Here is the excess allocation calculation based on given fair values:

Land: Fair value adjustment (+$12,000 from $90,000 to $102,000)

Buildings: Fair value adjustment (+$48,000 from $140,000 to $188,000)

Equipment: Fair value adjustment (-$24,000 from $240,000 to $216,000)

Unrecorded patent: This is calculated as the residual amount.

The total fair value of net assets is calculated by adding the fair value adjustments to the book value of equity ($300,000 common stock + $120,000 retained earnings).

Subtracting the total fair value of net assets from the purchase price gives us the value assigned to the unrecorded patent. This patent value is then amortized over 10 years.

Consolidation Worksheet Journal Entries

Next, we prepare the journal entries for consolidation at the end of each year. This includes eliminating the investment account, recognizing the amortization of the excess purchase price allocation (including the patent), and adjusting the noncontrolling interest, if applicable.

For 2012, we also eliminate intercompany dividends and recognize Jackson's net income in Matthews's investment account using the equity method.

For 2013, adjustments are similar, keeping in mind any changes in the book value of Jackson's net assets and any additional amortization of intangible assets.

Consolidation Worksheet for December 31, 2013

Lastly, the consolidation worksheet for December 31, 2013, is prepared by combining the financials of Matthews and Jackson, while eliminating all intercompany balances and transactions, including the investment in Jackson and the corresponding equity accounts of Jackson recognized by Matthews, and recognizing the amortization entries related to the excess purchase price.