On January 1^st. Year 6, X Company issued $656,000 worth of common stock plus a commitment to pay another $50,000 in 2 years if Y’s sales were to grow 3% or more over the next 2 years for 100% of the assets and liabilities of Company Y.

Costs of negotiating the acquisition were:-

Costs of issuing shares……………………$10,000

Legal and accounting fees……………….. 8,000

The balance sheets of the two companies at December 31^st. Year 5 are presented below:-

X………………………………………….Y………

Cash………………………………………………………………………….$748,000……………………………….$20,800

Accounts receivable………………………………………………….. 168,000………………………………. 52,800

Goodwill………………………………………………………………………600,000………………………………..100,000

Inventories………………………………………………………………… 200,000……………………………….138,400

Plant………………………………………………………………………….1,028,000…………………….330,400

Accumulated Depreciation………………………………………. (700,000)………………………….…..(40,000)

Patents…………………………………………………………………….. 208,000………………………….. 52,800

TOTAL ASSETS…………………………………. $2,252,000………………….$655,200

Current liabilities……………………………………………………… 328,000……………………………… 102,000

Long-term debt………………………………………………………… 420,000……………………………… 162,000

Common shares……………………………………………………….. 712,000……………………………… 200,000

Retained Earnings…………………………………………………….. 792,000………………………………191,200

TOTAL LIABILITIES & OWNERS’ EQUITY…………………….. $2,252,000………………… $655,200

The fair values of the net identifiable assets of Y Company on this date are as follows:-

Cash……………………………………………………………$20,800

Accounts receivable……………………………………..44,000

Inventory………………………………………………………178,000

Plant………………………………………………………………352,000

Trademarks…………………………………………………… 68,000

Patents………………………………………………………….. 124,000

Current liabilities……………………………………………. 72,000

Long-term debt……………………………………………… 148,000

Required:-

PART A

i. Calculate the consolidated goodwill at the date of acquisition(6 marks)

ii. Prepare the eliminating entries at the date of acquisition.(8 marks) .

iii. Prepare the consolidated balance sheet at the date of acquisition(17 marks).

(SEE APPENDIX 1 AT BOTTOM OF PAGE)

PART B

Ignore Part A above.

X reports its acquisition of Y by the equity method. They paid $656,000 in cash for 80% (80,000 shares) of Y on January 1^st. Year 2. Y reported an income of $120,000 in Year 2 and $140,000 in Year 3. They paid dividends of $60,000 in both years 2 and 3. On January 1^st. Year 4, Y sold the investment in Y when the shares were trading at $10/share.

i. Calculate the balance in the investment account, under the equity method, on December 31^st, Year3.

ii. Make the journal entry for the gain /loss on the sale of the investment in Year 4.

iii. What is the balance in the investment account at the end of December 31^st. Year 3 under the cost method.