Question
CASE 4 : [12.5 Marks] On January 1, 2019, Triple A Company acquired Bodyguard Companys outstanding common stock for $842,000 in cash. As of that
CASE 4: [12.5 Marks]
On January 1, 2019, Triple A Company acquired Bodyguard Companys outstanding common stock for $842,000 in cash. As of that date the following information was acquired from Bodyguard, the subsidiary of Triple A:
Building (12-year life) was undervalued on its balance sheet by $72,000
Equipment (10-year life) was undervalued by $10,000
Licensing agreement (20-year life) unrecorded, assessed at $40,000
Book value as at January 1, 2019 was $720,000
Net income reported during 2019 was $100,000
Dividends paid in 2019 $30,000
Earnings by Bodyguard (subsidiary) in 2020 $120,000
Dividends distributed by Bodyguard in 2020 $20,000
As of December 31, 2021Triple A and Bodyguard reported the following for the year:
|
| Triple A December 31, 2021 | Bodyguard December 31, 2021 | ||
|
| Debit | Credit | Debit | Credit |
| Buildings | $1,540,000 |
| $460,000 |
|
| Cash and receivables | 50,000 |
| 90,000 |
|
| Common stock |
| $900,000 |
| $400,000 |
| Dividends paid | 70,000 |
| 10,000 |
|
| Equipment | 280,000 |
| 200,000 |
|
| Cost of goods sold | 500,000 |
| 120,000 |
|
| Depreciation expense | 100,000 |
| 60,000 |
|
| Inventory | 280,000 |
| 260,000 |
|
| Land | 330,000 |
| 250,000 |
|
| Liabilities |
| 480,000 |
| 260,000 |
| Retained earnings 1/1/21 |
| 1,360,000 |
| 490,000 |
| Revenues |
| 900,000 |
| 300,000 |
Required:
a. If Triple A applies the equity method, what is its investment account balance as of December 31, 2021?
b. If Triple A applies the initial value method, what is its investment account balance as of December 31, 2021?
c. Regardless of the accounting method in use by Triple A, what are the consolidated totals as of December 31, 2021, for each of the following accounts?
Buildings Revenues
Equipment Net income
Land Investment in Bodyguard
Depreciation expense Dividends paid
Amortization expense Cost of goods sold
d. Prepare the worksheet entries required on December 31, 2021, to consolidate the financial records of these two companies. Assume that Triple A applied the equity method to its investment account.
e. Discuss how would the worksheet entries in requirement (d) change if Triple A used the initial value method? Do not record the entries.
Answer:
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Cornerstones of Cost Management
Authors: Don R. Hansen, Maryanne M. Mowen
2nd edition
1111824401, 978-1111824402
