Chapter 3

Exercise 20: Solution: Equity Method

Entry S: December 31, 2020
Common stock—Abernethy............................................................. 250,000
Additional paid-in capital ................................................................ 50,000
Retained earnings—1/1/20 ............................................................. 100,000
Investment in Abernethy .......................................... 400,000

Entry A:
Land………….. ........................................................................ $10,000
Buildings. ………………………………………………………. $40,000
Goodwill……….. ...................................................................... $60,000
Equipment ............................................................... $20,000
Investment in Abernethy .................................... $90,000
Entry I:
Equity in subsidiary earnings .................................................. $74,000
Investment in Abernethy…………… $74,000
$80000-$6000=74000
Entry D:
Investment in Abernethy ......................................................... $10,000
Dividends declared………………….. $10,000
Entry E:
Depreciation expense............................................................... $6,000
Equipment ………………………………………………………………$4,000
Buildings............................................................. $10,000

Entry S: December 31, 2021

Common stock—Abernethy............................................................. 250,000
Additional paid-in capital ................................................................ 50,000
Retained earnings—1/1/21 (100000+80000-10000)……………………….$170000
Investment in Abernethy .......................................... 470,000

Entry A:
Land………….. ........................................................................ $10,000
Buildings. ………………………………………………………. $30,000
Goodwill……….. ...................................................................... $60,000
Equipment ............................................................... $16000
Investment in Abernethy .................................... $84,000

Entry I:
Equity in subsidiary earnings .................................................. $104,000
Investment in Abernethy…………… $104,000
$110000-$6000=104000
Entry D:
Investment in Abernethy ......................................................... $30,000
Dividends declared………………….. $30,000
Entry E:
Depreciation expense............................................................... $6,000
Equipment ………………………………………………………………$4,000
Buildings............................................................. $10,000

Workings:
Fair Value Allocation and Annual Amortization:
Acquisition fair value (consideration transferred) ..................................... $490,000
Book value ………………………………………………… ($400,000)
Excess fair value over book value ............................................................ $ 90,000
Excess fair value assigned to specific
accounts based on individual fair values Remaining Annual excess
 life amortizations
Land ..................................................... $10,000 -- --
Buildings ............................................. 40,000 4 yrs. $10,000
Equipment ............................................ (20,000) 5 yrs. (4,000)
Total assigned to specific
accounts ...................................... 30,000
Goodwill ................................................ 60,000 indefinite -0-
Total ...................................................... $90,000 $6,000

Exercise 20: Initial value method

Acquisition date value (consideration paid) ............................ $500,000
Book value .............................................................. (400,000)
Excess price paid over book value ......................... $100,000
Excess price paid assigned to specific Remaining Annual excess
accounts based on fair values life amortizations

Equipment $ 20,000 5 yrs. $4,000

Long-term liabilities 30,000 4 yrs. 7,500
Goodwill 50,000 indefinite -0-
Total $100,000 $11,500

Consolidation entries as of December 31, 2020

Entry S
Common stock—Abernethy .................................. 250,000
Additional paid-in capital ........................................ 50,000
Retained earnings—1/1/20 .................................... 100,000
Investment in Abernethy................................... 400,000
(To eliminate stockholders' equity accounts of subsidiary)
Entry A
Equipment .............................................................. 20,000
Long-term liabilities ................................................ 30,000
Goodwill ................................................................. 50,000
Investment in Abernethy .................................. 100,000
(To recognize allocations determined above in connection with
acquisition-date fair values)

Entry I
 Dividend income .................................................... 10,000
Dividends declared ........................................... 10,000
(To eliminate intra-entity dividend declarations recorded by parent as
income)

Entry E
Depreciation expense ............................................ 4,000
Interest expense..................................................... 7,500
Equipment......................................................... 4,000
Long-term liabilities........................................... 7,500
(To recognize 2020 amortization expense)

Consolidation Entries as of December 31, 2021

Entry *C
Investment in Abernethy ........................................ 58,500
Retained earnings—1/1/21 (Chapman) ........... 58,500
($80000-10000-11500)
(To convert parent company figures to equity method by recognizing
subsidiary's increase in book value for prior year [$80,000 net income
less $10,000 dividend declaration] and excess amortizations for that
period [$11,500])
Entry S
Common stock—Abernethy .................................. 250,000
Additional paid-in capital ........................................ 50,000
Retained earnings—1/1/21(100000+80000-10000)……170,000
Investment in Abernethy .................................. 470,000
(To eliminate beginning of year stockholders' equity accounts of
subsidiary. The retained earnings balance has been adjusted for 2020
net income and dividends)
Entry A
Equipment .............................................................. 16,000
Long-term liabilities ................................................ 22,500
Goodwill ................................................................. 50,000
Investment in Abernethy .................................. 88,500
(To recognize allocations relating to investment—balances shown here
are as of the beginning of the current year [original allocation less
excess amortizations for the prior period])
Entry I
Dividend income .................................................... 30,000
Dividends declared ..................................... 30,000
(To eliminate intra-entity dividend declarations recorded by parent as
income)
Entry E
Depreciation expense ............................................ 4,000
Interest expense..................................................... 7,500
Equipment......................................................... 4,000
Long-term liabilities........................................... 7,500
(To recognize 2021 amortization expense)
Exercise 21: partial equity method
Fair value allocation and annual excess amortizations:
Abernethy fair value (consideration paid) .......................... $520,000
Book value ......................................................................... (400,000)
Excess fair value over book value (all goodwill) ................ $120,000

Excess amortization (indefinite life for goodwill) ................ -0-

Consolidation Entries as of December 31, 2020
Entry S
Common stock—Abernethy .................................... 250,000
Additional paid-in capital ......................................... 50,000
Retained earnings—Abernethy—1/1/20 ................. 100,000
Investment in Abernethy .................................... 400,000
(To eliminate stockholders' equity accounts of subsidiary)
Entry A
Goodwill .................................................................. 120,000
Investment in Abernethy .................................... 120,000
(To recognize goodwill portion of the original acquisition fair value)
Entry I
Equity in earnings of subsidiary............................... 80,000
Investment in Abernethy .................................... 80,000
(To eliminate intra-entity income accrual for the current year based on the
parent's usage of the partial equity method)
Entry D
Investment in Abernethy ......................................... 10,000
Dividends declared ............................................ 10,000
(To eliminate intra-entity dividend transfers)
Entry E—Not needed. Goodwill is not amortized.

Consolidation Entries as of December 31, 2021

Entry *C—Not needed. Goodwill is not amortized.

Entry S
Common stock—Abernethy..................................... 250,000
Additional paid-in capital—Abernethy ..................... 50,000
Retained earnings—Abernethy—1/1/21 ................. 170,000
Investment in Abernethy .................................... 470,000
 (To eliminate beginning of year stockholders' equity accounts of subsidiary—
the retained earnings balance has been adjusted for 2020 income and
dividends.)

Entry A
Goodwill .................................................................. 120,000
Investment in Abernethy .................................... 120,000
(To recognize original goodwill balance.)

Entry I
Equity in earnings of subsidiary............................... 110,000
Investment in Abernethy .................................... 110,000
(To eliminate Intra-entity Income accrual for the current year.)

Entry D
Investment in Abernethy ......................................... 30,000
Dividends declared ............................................ 30,000
(To eliminate Intra-entity dividend transfers.)

Equity E—not needed