C4-3 Negative Retained Earnings

Understanding

Although Sloan Company had good earnings reports in 20X5 and 20X6, it had a negative retained earnings balance on December 31, 20X6. Jacobs Corporation purchased 100 percent of Sloans common stock on January 1, 20X7.

Required

a. Explain how Sloans negative retained earnings balance is reflected in the consolidated balance sheet immediately following the acquisition.

b. Explain how the existence of negative retained earnings changes the consolidation worksheet entries.

c. Can goodwill be recorded if Jacobs pays more than book value for Sloans shares? Explain.