On January 1, Year 1, Parent Company acquires a 100% interest in Subsidiary Comp
ID: 2586909 • Letter: O
Question
On January 1, Year 1, Parent Company acquires a 100% interest in Subsidiary Company by issuing 100,000 shares of $10 par common stock. The market value of the stock at the date of issuance was $17.60 per share. The investment was accounted for internally using the cost method. During Year 1, Subsidiary Company reported net income of $400,000 and declared and paid $10,000 of dividends. Parent uses straight-line depreciation and estimates the remaining life of plant and equipment to be three years. Any excess over fair value is goodwill. Assume goodwill is determined to be impaired by $2,000 for the year. An intercompany receivable and payable of $30,000 was included on the respective financial statements of each company. The purchase is properly accounted for as an acquisition.
Subsidiary Assets and Liabilities at Date of Acquisition
1. Eliminate intercompany transaction associated with the income statement:
2. Record incremental increases in depreciation association with assets revaluation
3.Record ajustment to Goodwill
4. Eliminate intercompany transaction associated with the income statement
5. Eliminate intercompany transaction associated with the balance sheet exclusive of investments
Subsidiary Assets and Liabilities at Date of Acquisition
Book Value Fair Value Excess Fair Value Over Book Value Assets Cash $130,000 $130,000 Accounts receivable 1,000,000 1,000,000 Inventory 2,000,000 2,000,000 Plant and equipment 1,000,000 1,950,000 $950,000 Total assets $4,130,000 $5,080,000 Liabilities Accounts payable $1,000,000 $1,000,000 Interest payable 380,000 380,000 Mortgage payable 2,000,000 2,000,000 Total liabilities $3,380,000 $3,380,000 Equity Common stock $600,000 A.P.I.C 100,000 Retained earnings 50,000 Total equity $750,000 Total liabilities and equity $4,130,0001. Eliminate intercompany transaction associated with the income statement:
2. Record incremental increases in depreciation association with assets revaluation
3.Record ajustment to Goodwill
4. Eliminate intercompany transaction associated with the income statement
5. Eliminate intercompany transaction associated with the balance sheet exclusive of investments
Explanation / Answer
1. Intercompany transaction associated with income statement is with respect to dividend paid by the subsidiary income. It will be eliminated using below journal entry:
2. Incremental depreciation = Excess of fair value over book value / Remaining life
= $950,000 / 3 = $316,667
Journal entry to record the incremental depreciation:
3. Entry to record adjustment to goodwill
4. Same as of 1
5. Journal entry to eliminate intercompany transaction associated with the balance sheet
Description Debit Credit Dividend income (Parent company) $10,000 Dividend paid (Subsidiary company) $10,000