Chapter 2, Problem 60P

a.

To determine

Evaluate the subsidiary's total fair value as of the acquisition date.

Explanation of Solution

An acquisition is when one company acquires most or all of the shares of another company to gain control over that company. Acquisition accounting is a set of formal directives defining how an acquired company's assets, liabilities, non-controlling interest (NCI) and goodwill must be recorded by the purchaser on its consolidated financial statement.

Calculate the subsidiary's total fair value:

$\begin{array}{c}\text{Subsidiary's total fair value}=80,000\times \$10\\ =\$800,000\end{array}$

Hence, the subsidiary's total fair value is $\$800,000.$

Working Notes:

Number of shares issued by the parent company is $80,000.$

Fair value per share is $ 10.

b.

To determine

Prepare the consolidation entries on the date of acquisition.

Explanation of Solution

Consolidated financial statements are a group of entities financial statements that are presented as those of a single economic entity. They are the financial statements of a group in which the parent company and its subsidiaries introduce their assets, liabilities, equity, revenue, expenses and cash flows as those of a single business organization.

Consolidated accounting is used to club a parent company's financial information and one or more subsidiaries. The parent prepares consolidated financial statements through adjustment of entries and elimination of transactions between companies.

The required consolidation journal entries are as follows:

Date	Account title and Explanation	Post Ref	Debit ($)	Credit ($)
	[E]   Common stock		$\$100,000$
	APIC		$\$150,000$
	Retained earnings c		$\$300,000$
	Equity investment			$\$550,000$
	(To eliminate the Stockholders’ Equity of the subsidiary on the acquisition date)

Table (1)

Date	Account title and Explanation	Post Ref	Debit ($)	Credit ($)
	[A]   Patent		$\$150,000$
	Goodwill		$\$100,000$
	Equity investment			$\$250,000$
	(To record the [A] assets purchased on the acquisition date)

Table (2)

Working Notes:

Common stock of subsidiary is $\$100,000.$

On date of acquisition, contributed capital of subsidiary is $\$150,000$ and $\$300,000$ is of retained earnings.

c.

To determine

Prepare the consolidated balance sheet on the date of acquisition.

Explanation of Solution

Consolidated financial statements are a group of entities financial statements that are presented as those of a single economic entity. They are the financial statements of a group in which the parent company and its subsidiaries introduce their assets, liabilities, equity, revenue, expenses and cash flows as those of a single business organization.

A consolidated balance sheet provides a parent company's assets and liabilities and all of its subsidiaries in a legal document, without any differentiation on which items pertain to which companies.

The consolidated balance sheet on the date of acquisition is shown below:

						Consolidation entries
		Parents		Subsidiary		Dr		Cr		Consolidated
Assets
Cash		$1,000,000		$160,000						$1,160,000
Accounts receivable		1,200,000		240,000						1,440,000
Inventory		1,600,000		300,000			[E]	550,000		1,900,000
Equity investment		800,000					[A]	250,000		0
PPE, net		3,000,000		800,000						$3,800,000
Patent					[A]	150,000				150,000
Goodwill					[A]	100,000				100,000
		$7,600,000		$1,500,000						$8,550,000
Liabilities’ and Equity
Accounts payable		$600,000		$150,000						$750,000
Accrued liabilities		1,000,000		200,000						1,200,000
Long-term liabilities		2,000,000		600,000						$2,600,000
Common stock		800,000		100,000	[E]	100,000				800,000
APIC		1,400,000		150,000	[E]	150,000				1,400,000
Retained earnings		1,800,000		300,000	[E]	300,000				1,800,000
		$7,600,000		$1,500,000		$800,000		$800,000		$8,550,000

d.

To determine

Mention the category prior to consolidation in which intangible assets were placed on the parent or subsidiary balance sheets.

Explanation of Solution

Unlike physical assets, such as machinery and buildings, and financial assets such as government securities, an intangible asset is an asset that appears to lack physical appearance. An intangible asset is normally very difficult to assess. Patents, copyrights, franchises, goodwill, trademarks and trade names are examples. Also includes software and other intangible computer-based assets in the general interpretation; these are all examples of intangible assets.

In the consolidation process we recognized the Patent and Goodwill assets. These assets were previously embedded on the balance sheet of the Parent in the Equity investment account. These are explicitly recognized in the consolidation process.