Consolidation at End of First Year

Peak Entertainment acquires its 100-percent-owned subsidiary Saddlestone Inc. on January 1, 2013. In preparing to consolidate Peak and Saddlestone at December 31, 2013, you assemble the following information:

Value of stock given up to acquire Saddlestone: $16,000,000.

Direct merger costs: $400,000.

Saddlestone's stockholders' equity at acquisition: $11,520,000.

Fair value of earnings contingency agreement to be paid in cash: $480,000.

Fair value of previously unrecorded identifiable intangibles (8-year life): $3,200,000.

Goodwill and identifiable intangibles are not impaired in 2013.

Saddlestone's net income in 2013: $4,800,000.

Saddlestone's dividends paid in 2013: $1,600,000.

(a) Prepare the 2013 journal entries made by Peak to record the acquisition and calculate and record the equity method income accrual, using the complete equity method.

Peak's entries to record the acquisition:

General Journal
Description	Debit	Credit
AnswerCapital stockInvestment in SaddlestoneGoodwillCash	Answer	Answer
Merger expenses	Answer	Answer
AnswerCapital stockCashInvestment in SaddlestoneGoodwill	Answer	Answer
Contingent consideration liability	Answer	Answer
Cash	Answer	Answer

Peak's equity method entries for 2013:

General Journal
Description	Debit	Credit
AnswerCashGoodwillEquity in net income of SaddlestoneInvestment in Saddlestone	Answer	Answer
AnswerCashInvestment in SaddlestoneEquity in net income of SaddlestoneGoodwill	Answer	Answer
To record equity in net income.
AnswerGoodwillEquity in net income of SaddlestoneCashInvestment in Saddlestone	Answer	Answer
AnswerInvestment in SaddlestoneGoodwillCapital stockCash	Answer	Answer
To record dividends received.

(b) Prepare the consolidation eliminating entries made at December 31, 2013.

Consolidation Journal
Description	Debit	Credit
(C)
AnswerInvestment in SaddlestoneGoodwillCashEquity in net income of Saddlestone	Answer	Answer
Dividends - Saddlestone	Answer	Answer
AnswerCashGoodwillEquity in net income of SaddlestoneInvestment in Saddlestone	Answer	Answer
(E)
AnswerStockholders' equity - Saddlestone, 1/1GoodwillInvestment in SaddlestoneCash	Answer	Answer
AnswerStockholders' equity - Saddlestone, 1/1CashInvestment in SaddlestoneGoodwill	Answer	Answer
(R)
Identifiable intangibles	Answer	Answer
AnswerAmortization expenseGoodwillCashInvestment in Saddlestone	Answer	Answer
AnswerInvestment in SaddlestoneCashGoodwillIdentifiable intangibles	Answer	Answer
(O)
AnswerIdentifiable intangiblesCashGoodwillAmortization expense	Answer	Answer
AnswerAmortization expenseCashGoodwillIdentifiable intangibles	Answer	Answer