Question

Assume that on January 1, 2015, a parent purchases a subsidiary with a book value of stockholders’ equity of $1,000,000 for $1,500,000. To finance the purchase, the parent issues 50,000 shares of its $1 par common stock having a market value of $30 per share and exchanges those shares with the sub’s stockholders for all of the sub’s voting shares that they own. At the date of acquisition, the sub’s book values approximated fair values except for two items. PP&E was undervalued by $200,000 and the sub had developed a patent internally that the parent estimates had a fair value of $175,000. The expected useful life of the patent is 10 years and the PP&E has a remaining useful life of 20 years. During the year ended December 31, 2015, the first year after the acquisition, the sub reported sales of $1,500,000; COGS was $900,000 and operating expenses were $390,000. The sub also paid a dividend of $31,500 to the parent. Using the Equity Method to account for the business combination both at, and subsequent to, the acquisition, determine the allocation of the excess fair value and make the appropriate journal entries to record the acquisition and 2015 activity.

Answer 1

Journal entries are given below;

Step-by-step explanation:

January 2015

Investment in Subsidiary (Dr.) $1500,000

Share Capital (Cr.) $50,000

Share Premium (Cr.) $1450,000

To record investment in Subsidiary

Revaluation reserve (Dr.) $200,000

PP&E (Cr.) $200,000

To record devaluation of PP&E

Patent - Intangible Asset (Dr.) $175,000

Revaluation reserve (Cr.) $175,000

To record the patent generated internally

December 2015

Amortization expense (Dr.) $17,500

Intangible Asset (Cr.) $17,500

Dividend Income (Dr.) $31,500

Investment (Cr.) $31,500