Answer:
a. See the journal entries in the explanation below.
Retained Earnings is $175,000
Goodwill is $25,000
b. See the journal entries in the explanation below.
Retained Earnings is $175,000
Capital Reserve is $4,000
Step-by-step explanation:
Note: There are mistakes the names of the companies in the requirements a anb b. These correctly restated before answering the question by as follows:
a. Prepare the following consolidation entries required to prepare a consolidated balance sheet immediately after the business combination assuming Power acquired its ownership of Scrub for $291,000. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
1. Record the basic consolidation entry
2. Record the excess value (differential reclassification entry)
b. Prepare the following consolidation entries required to prepare a consolidated balance sheet immediately after the business combination assuming Power acquired its ownership of Scrub for $262,000. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
1. Record the basic consolidation entry.
2. Record the excess value (differential) reclassification entry.
The answers and explanation are therefore given as follows:
a. Prepare the following consolidation entries required when Consideration is $291,000
1. Record the basic consolidation entry
Accounts Dr ($) Cr ($)
Common Stock 91,000
Retained Earnings (w.1) 175,000
Goodwill (w.2) 25,000
Investment in Scrub Company 291,000
(To record the elimination of investment and stockholder equity.)
2. Record the excess value (differential reclassification entry)
Note that $25,000 is transferred to Goodwill account in part 1 above.
The $25,000 is transferred to Goodwill because when the consideration is greater than the net asset value which is calculated as the of Common Stock and Retained Earnings, the difference is the Goodwill.
When Net Consideration is more than the net asset value (Stockholder Equity), then the difference is to be transferred to Goodwill.
Workings:
w.1: Calculation of retained earning to be eliminated
Particulars $
Retained Earnings Balance 160,000
Increase in land value 21,000
Decrease in inventories values (6,000)
Fair Value retained earnings to be eliminated 175,000
w.2: Calculation of Goodwill to be recognized
Particulars $ $
Consideration paid for acquisition 291,000
Assets of Scrub:
Asset book value 420,000
Increase in land value 21,000
Decrease in inventories values (6,000)
Assets 435,000
Liabilities (169,000)
Net asset value of Scrub (266,000)
Goodwill to be recognized 25,000
b. Prepare the following consolidation entries required when Consideration is $262,000
1. Record the basic consolidation entry
Accounts Dr ($) Cr ($)
Common Stock 91,000
Retained Earnings (w.3) 175,000
Investment in Scrub Company 262,000
Capital reserve (w.4) 4,000
(To record the elimination of investment and stockholder equity.)
2. Record the excess value (differential reclassification entry)
Note that $4,000 is transferred to Capital Reserve in part 1 above.
The $4,000 is transferred to Capital Rserve because when the consideration is less than the net asset value which is calculated as the of Common Stock and Retained Earnings, the difference is Capital Reserve.
When Net Consideration is less than the net asset value (Stockholder Equity), then the difference is to be transferred to Capital reserve.
Workings:
w.3: Calculation of retained earning to be eliminated
Particulars $
Retained Earnings Balance 160,000
Increase in land value 21,000
Decrease in inventories values (6,000)
Fair Value retained earnings to be eliminated 175,000
w.4: Calculation of Goodwill to be recognized
Particulars $ $
Consideration paid for acquisition 262,000
Assets of Scrub:
Asset book value 420,000
Increase in land value 21,000
Decrease in inventories values (6,000)
Assets 435,000
Liabilities (169,000)
Net asset value of Scrub (266,000)
Capital reserve to be recognized (4,000)