Problem 1.

We examine consolidations in years after the acquisition has taken place. Continuing with the same example from above, assume that P acquires 100% of the stock of S for $1,000,000 cash on 1/1/21. Ss accounts at the acquisition date are as follows:

Book Value Fair Value Difference

Current assets $350,000 $350,000 -0-

Land 300,000 400,000 100,000

Buildings (10-year life) 500,000 650,000 150,000

Equipment (5-year life) 200,000 150,000 (50,000)

Liabilities (650,000) (650,000) -0-

Net assets $700,000 $900,000 $ 200,000

Common stock 100,000

Additional PIC 200,000

Retained earnings 400,000

S earns income of $80,000 during 2021 and pays a cash dividend of $30,000. In addition, S earns income of $100,000, $120,000, and $125,000 and pays dividends of $30,000, $35,000, and $40,000 in 2022, 2023, and 2024, respectively. We want to prepare consolidated financial statements as of 12/31/24.

a) Now assume instead that P uses the initial value method to account for S. What is the balance in the investment account as of 12/31/24???

NOTE: Use of the initial value or partial equity method will require an additional consolidating entry to adjust consolidated Retained Earnings to whatever balance it would have if the equity method had been used since the acquisition.

Consolidating entries are ???:

b)Now assume that P uses the partial equity method to account for S.

Balance in the Investment in S account as of 12/31/24???

Consolidating entries: are??