Pushdown Accounting

Assume a parent company acquires its subsidiary by paying $1,700,000 for all of the outstanding voting shares of the investee. On the acquisition date, subsidiary's assets and liabilities have individual fair values that equal their book values, except for property equipment with a fair value greater than book value by $150,000 and license with a fair value greater than book value by $250,000. The parent and subsidiary have the following balance sheets immediately after the acquisition, but before any pushdown adjustments by the subsidiary:

Parent

	Parent	Subsidiary
Assets:
Cash & receivables	$ 800,000	$ 350,000
Inventory	600,000	200,000
Property & equipment, net	2,300,000	1,025,000
Equity investment	1,700,000
Licenses	-	275,000
	$ 5,400,000	$ 1,850,000
Liabilities and stockholders' equity:
Current liabilities	$ 400,000	$ 400,000
Other liabilities	300,000	-
Note payable	-	600,000
Common stock	1,670,000	100,000
APIC	1,430,000	200,000
Retained earnings	1,600,000	550,000
	$ 5,400,000	$ 1,850,000

a. Compute the amount of goodwill implicit in the acquisition of the subsidiary. $Answer

b. Assume the subsidiary elects to apply pushdown accounting immediately after the above financial statements were prepared. Provide the journal entries required for the subsidiary to apply pushdown accounting.

Description	Debit	Credit
Property & equipment, net	Answer	Answer
Licenses	Answer	Answer
AnswerAdditional paid in capitalCashCommon stockEquity investmentGoodwillLicensesPushdown equityRetained earnings	Answer	Answer
AnswerAdditional paid in capitalCashCommon stockEquity investmentGoodwillLicensesPushdown equityRetained earnings	Answer	Answer
To record AAP in subsidiary's standalone financial statements.
AnswerAdditional paid in capitalCashCommon stockEquity investmentGoodwillLicensesPushdown equityRetained earnings	Answer	Answer
AnswerAdditional paid in capitalCashCommon stockEquity investmentGoodwillLicensesPushdown equityRetained earnings	Answer	Answer
To reclassify subsidiary's retained earnings.

c. Prepare the consolidation entry or entries on the date of acquisition, assuming the subsidiary applied pushdown accounting.

Description		Debit	Credit
[E]	Common stock	Answer	Answer
	APIC	Answer	Answer
	AnswerAdditional paid in capitalCashCommon stockEquity investmentGoodwillLicensesPushdown equityRetained earnings	Answer	Answer
	AnswerAdditional paid in capitalCashCommon stockEquity investmentGoodwillLicensesPushdown equityRetained earnings	Answer	Answer

d. Prepare the consolidated balance sheet on the date of acquisition.

Consolidated Balance Sheet
Assets:
Cash & receivables		Answer
Inventory		Answer
Property & equipment, net		Answer
Licenses		Answer
AnswerAdditional paid in capitalCashCommon stockEquity investmentGoodwillLicensesPushdown equityRetained earnings		Answer
		Answer
Liabilities and stockholders' equity:
Current liabilities		Answer
Other liabilities		Answer
Note payable		Answer
Common stock		Answer
APIC		Answer
Retained earnings		Answer
		Answer

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