Consolidation at date of acquisition (purchase price greater than book value, acquisition journal entries, deferred tax liability) Assume that the parent company acquires its subsidiary in a nontaxable transaction by exchanging 96,000 shares of its $5 par value Common Stock, with a fair value on the acquisition date of $42 per share, for all of the outstanding voting shares of the investee. In its analysis of the investee company, the fair value of each of the subsidiarys assets and liabilities equals their respective book values except for property, plant and equipment (PPE) assets that are undervalued by $760,000, an unrecorded Customer List with a fair value of $250,000, and an unrecorded Brand Name asset valued at $570,000. And, finally, assume that the tax bases of the subsidiarys pre-acquisition identifiable net assets equal their book values. The parent companys effective tax rate is 36%.

a. Prepare the journal entry that the parent makes to record the acquisition.

General Journal

Description

Debit

Credit

AnswerEquity investmentCustomer listBrand nameGoodwillCommon stockAPICRetained earnings

Answer

Answer

AnswerEquity investmentCustomer listBrand nameGoodwillCommon stockAPICRetained earnings

Answer

Answer

APIC

Answer

Answer

b. Given the following acquisition-date balance sheets for the parent and its subsidiary, prepare the consolidation spreadsheet.

				Elimination Entries
Balance Sheet	Parent	Subsidiary		Dr	Cr		Consolidated
Assets
Cash	$939,960	$149,760					$Answer
Accounts receivable	460,800	1,002,240					Answer
Inventory	1,200,000	1,287,360					Answer
Equity investment	4,032,000				Answer	[E]	Answer
					Answer	[A]
Property, plant and equipment (PPE), net	13,568,000	2,381,760	[A]	Answer			Answer
Customer list			[A]	Answer			Answer
Brand name			[A]	Answer			Answer
AnswerEquity investmentCustomer listBrand nameGoodwillCommon stockAPICRetained earnings			[A]	Answer			Answer
	$20,200,760	$4,821,120					$Answer
Liabilities and stockholders equity
Accounts payable	$225,720	$182,880					$Answer
Accrued liabilities	264,960	318,240					Answer
Long-term liabilities	2,400,000	1,440,000					Answer
Deferred income tax liability					Answer	[A]	Answer
Common stock	816,000	288,000	[E]	Answer			Answer
APIC	6,240,000	360,000	[E]	Answer			Answer
Retained earnings	10,254,080	2,232,000	[E]	Answer			Answer
	$20,200,760	$4,821,120		Answer	Answer		$Answer