Question

Branson paid $566,700 cash for all of the outstanding common stock of Wolfpack, Inc., on January 1, 2017. On that date, the subsidiary had a book value of $411,000 (common stock of $200,000 and retained earnings of $211,000), although various unrecorded royalty agreements (10-year remaining life) were assessed at a $136,000 fair value. Any remaining excess fair value was considered goodwill. In negotiating the acquisition price, Branson also promised to pay Wolfpack’s former owners an additional $59,000 if Wolfpack’s income exceeded $130,000 total over the first two years after the acquisition. At the acquisition date, Branson estimated the probability-adjusted present value of this contingent consideration at $51,800. On December 31, 2017, based on Wolfpack’s earnings to date, Branson increased the value of the contingency to $59,200.

During the subsequent two years, Wolfpack reported the following amounts for income and dividends:

Net Income Dividends Declared
2017 $78,000 $15,000
2018 88,000 25,000

In keeping with the original acquisition agreement, on December 31, 2018, Branson paid the additional $74,000 performance fee to Wolfpack’s previous owners.

Prepare each of the following:

a. Branson’s entry to record the acquisition of the shares of its Wolfpack subsidiary.
b. Branson’s entries at the end of 2017 and 2018 to adjust its contingent performance obligation for changes in fair value and the December 31, 2018, payment.
c. Prepare consolidation worksheet entries as of December 31, 2018, assuming that Branson has applied the equity method.
d. Prepare consolidation worksheet entries as of December 31, 2018, assuming that Branson has applied the initial value method.

Answer 1

Answer:

a.

Dr Investment in Wolfpack, Inc. 618,500

Cr Contingent performance obligation 51,800

Cr Cash 566,700

b.

12/31/17

Dr Loss from increase in contingent performance obligation 7,400

Cr Contingent performance obligation 7,400

12/31/17

Dr Loss from increase in contingent performance obligation 200

Cr Contingent performance obligation 200

12/31/18

Dr Contingent performance obligation 59,000

Cr Cash 59,000

c.

Equity Method

Dr Common stock- Wolfpack 200,000

Dr Retained earnings-Wolfpack 274,000

Cr Investment in Wolfpack 474,000

Dr Royalty agreements 122,400

Dr Goodwill 71,500

Cr Investment in Wolfpack 193,900

Dr Equity earnings of Wolfpack 74,400

Cr Investment in Wolfpack 74,400

Dr Investment in Wolfpack 25,000

Cr Dividends paid 25,000

Dr Amortization expense 13,600

Cr Royalty agreements 13,600

d.

Initial Value Method

Dr Investment in Wolfpack 59,400

Cr Retained earnings-Branson 59,400

Dr Common stock- Wolfpack 200,000

Dr Retained earnings-Wolfpack 284,000

Cr Investment in Wolfpack 484,000

Dr Royalty agreements 122,400

Dr Goodwill 71,500

Cr Investment in Wolfpack 193,900

Dr Dividend income 25,000

Cr Dividends paid 25,000

Dr Amortization expense 13,600

Cr Royalty agreements 13,600

Explanation:

a. Preparation of the Journal entry to record the acquisition of the shares of its Wolfpack subsidiary

Dr Investment in Wolfpack, Inc. 618,500

Cr Contingent performance obligation 51,800

Cr Cash 566,700

(566,700+51,800)

b. Preparation of the Journal entries at the end of 2017 and 2018 and the December 31, 2018, payment.

12/31/17

Dr Loss from increase in contingent performance obligation 7,400

(59,200 - 51,800)

Cr Contingent performance obligation 7,400

12/31/17

Dr Loss from increase in contingent performance obligation 200

(59,000 - 59,200)

Cr Contingent performance obligation 200

12/31/18

Dr Contingent performance obligation 59,000

Cr Cash 59,000

c. Preparation of consolidation worksheet journal entries as of December 31, 2018

Equity Method

Dr Common stock- Wolfpack 200,000

Dr Retained earnings-Wolfpack 274,000

(211,000+ (78,000 - 15,000)

Cr Investment in Wolfpack 474,000 (274,000+200,000)

Dr Royalty agreements 122,400

(136,000 - 13,600)

(136,000/10 years=13,600)

Dr Goodwill 71,500

( 618,500- 411,000 - 136,000)

Cr Investment in Wolfpack 193,900

(122,400+71,500)

Dr Equity earnings of Wolfpack 74,400

(88,000 - 13,600)

Cr Investment in Wolfpack 74,400

Dr Investment in Wolfpack 25,000

Cr Dividends paid 25,000

Dr Amortization expense 13,600

(136,000/10 years)

Cr Royalty agreements 13,600

d. Preparation of consolidation worksheet journal entries as of December 31, 2018,

Initial Value Method

Dr Investment in Wolfpack 59,400

(88,000-15,000-13,600)

Cr Retained earnings-Branson 59,400

Dr Common stock- Wolfpack 200,000

Dr Retained earnings-Wolfpack 284,000

(211,000+ (88,000 - 15,000)

Cr Investment in Wolfpack 484,000

(284,000+200,000)

Dr Royalty agreements 122,400

(136,000 - 13,600)

Dr Goodwill 71,500

( 618,500 - 411,000 - 136,000)

Cr Investment in Wolfpack 193,900

Dr Dividend income 25,000

Cr Dividends paid 25,000

Dr Amortization expense 13,600

Cr Royalty agreements 13,600