Question
Branson paid $621,000 cash for all of the outstanding common stock of Wolfpack, Inc., on January 1, 2017. On that date, the subsidiary had a
Branson paid $621,000 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 $433,000 (common stock of $200,000 and retained earnings of $233,000), although various unrecorded royalty agreements (10-year remaining life) were assessed at a $160,000 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 $70,000 if Wolfpack's income exceeded $120,000 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 $49,000. On December 31, 2017, based on Wolfpack's earnings to date, Branson increased the value of the contingency to $56,000.
During the subsequent two years, Wolfpack reported the following amounts for income and dividends:
Net Income. Dividends Declared
2017 $65,900 $20,000
2018 75,900 30,000
In keeping with the original acquisition agreement, on December 31, 2018, Branson paid the additional $70,000 performance fee to Wolfpack's previous owners.
Prepare each of the following:
- Branson's entry to record the acquisition of the shares of its Wolfpack subsidiary.
- 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.
- Prepare consolidation worksheet entries as of December 31, 2018, assuming that Branson has applied the equity method.
- Prepare consolidation worksheet entries as of December 31, 2018, assuming that Branson has applied the initial value method.
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