Question

Chapman Company obtains 100 percent of Abernethy Company’s stock on January 1, 2020. As of that date, Abernethy has the following trial balance:

Debit Credit
Accounts payable $ 52,800
Accounts receivable $ 49,500
Additional paid-in capital 50,000
Buildings (net) (4-year remaining life) 174,000
Cash and short-term investments 84,000
Common stock 250,000
Equipment (net) (5-year remaining life) 315,000
Inventory 137,500
Land 90,500
Long-term liabilities (mature 12/31/23) 188,500
Retained earnings, 1/1/20 323,600
Supplies 14,400
Totals $ 864,900 $ 864,900


During 2020, Abernethy reported net income of $129,000 while declaring and paying dividends of $16,000. During 2021, Abernethy reported net income of $176,000 while declaring and paying dividends of $38,000.



Assume that Chapman Company acquired Abernethy’s common stock for $733,100 in cash. As of January 1, 2020, Abernethy’s land had a fair value of $101,000, its buildings were valued at $242,000, and its equipment was appraised at $279,500. Chapman uses the equity method for this investment.



Prepare consolidation worksheet entries for December 31, 2020, and December 31, 2021. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

To prepare the consolidation worksheet entries, we first need to calculate the excess of investment cost over book value of Abernethy's net assets. The book value of Abernethy's net assets is calculated as the total of common stock, additional paid-in capital, and retained earnings. The fair values of land, buildings, and equipment need to be taken into account as well.

On January 1, 2020, the book value of Abernethy's net assets is: $250,000 (common stock) + $50,000 (additional paid-in capital) + $323,600 (retained earnings) = $623,600

The fair value of Abernethy's land, buildings, and equipment is: $101,000 (land) + $242,000 (buildings) + $279,500 (equipment) = $622,500

The excess of investment cost over book value is: $733,100 (investment cost) - $622,500 (fair value of net assets) = $110,600

The entries for 2020 would be:

1. Investment in Abernethy Company 733,100
Common Stock - Abernethy 250,000
Additional Paid-In Capital - Abernethy 50,000
Retained Earnings - Abernethy 323,600
Land 10,500
Buildings 68,000
Equipment -35,500
Goodwill 66,500

2. Investment in Abernethy Company 129,000
Equity in Subsidiary Earnings 129,000

3. Equity in Subsidiary Earnings 16,000
Investment in Abernethy Company 16,000

For 2021:

1. Investment in Abernethy Company 176,000
Equity in Subsidiary Earnings 176,000

2. Equity in Subsidiary Earnings 38,000
Investment in Abernethy Company 38,000

Please note that the calculations and entries above are simplified and actual consolidation entries might require more detailed calculations and adjustments.