Question: P Corporation acquired 100 percent of S Company’s outstanding common stock
on January 1, 2022, for $550,000 cash. S reported net assets with a book value of $350,000
at that time. Some of S assets had fair values that differed from book values as follows:
Items Book Values Fair Values
Land $60,000 160,000
Furniture (5-year life) 75,000 150,000
Equipment (10-year life) 342,000 312,000
Any goodwill is considered to have an indefinite life with no impairment charges during the
year. Following are financial statements at the end of the first year for these two companies
prepared from their separately maintained accounting systems.
ITEMS P S
Revenues 1,125,000 520,000
COGS 300,000 228,000
Depreciation expense 75,000 70,000
Amortization expense 25,000 0
Income from S 210,000 0
Net Income 935,000 222,000
Retained earning1/1/2022 700,000 250,000
Net income 935,000 222,000
Dividends paid 142,000 80,000
Retained earnings 31/12/2022 1,493,000 392,000
Cash 185,000 105,000
Receivables 225,000 56,000
Furniture 175,000 135,000
Investment in S 680,000
land 474,000 60,000
Equipment (net) 925,000 272,000
Total Assets 2,664,000 628,000
Liabilities 771,000 136,000
Common Stock 400,000 100,000
Retained Earnings 31/12/2022 1,493,000 392,000
Total liabilities and equity 2,664,000 628,000
Required:
a) Prepare elimination entries at 31/12/2022
b) Show how P computed the $210,000 Income of S balance.
c) Using the preceding information, prepare a consolidation worksheet for these two
companies as of December 31, 2022.
Solution: (100% with differential)
Investment 550,000
Less: Net Assets book value (350,000)
Differential 200,000
Less: Excess of fair value
Land 100,000
Furniture 75,000
Equipment (30,000)
Total Excess of fair value (145,000)
Goodwill 55,000
Schedule of amortization
Item Difference Amortization 100%
Land +100,000 0 0
Furniture +75,000 (15,000) (15,000)
Equipment (30,000) 3,000 3,000
Goodwill +55,000 0 0
Total 200,000 (12,000) (12,000)
a) Elimination entries on 31/12/2022:
Income from S company 210,000
Dividend 80,000
Investment in S company 130,000
Depreciation expense 15,000
Furniture 15,000
Equipment 3,000
Depreciation expense 3,000
b) P company record the following entry:
Investment in S company 222,000
Income from S company 222,000
Income from S company 12,000
Investment in S company 12,000
*Income from S company= 222,000 – 12,000 = 210,000
Item P company S company Dr. Cr. Consolidation
Revenues 1,125,000 520,000 1,645,000
COGS 300,000 228,000 528,000
Depreciation expense 75,000 70,000 15,000 3,000 157,000
Amortization expense 25,000 0 25,000
Net Income 725,000 222,000 935,000
Income from S company 210,000 0 210,000 0
Total 935,000 222,000 225,000 3,000 935,000
Item P company S company Dr. Cr. Consolidation
Beginning balance 1/1 700,000 250,000 250,000 700,000
Add: Income 935,000 222,000 225,000 3,000 935,000
Less: Dividends paid (142,000) (80,000) 80,000 (142,000)
Closing balance 31/12 1,493,000 392,000 475,000 83,000 1,493,000
Item P company S company Dr. Cr. Consolidation
Cash 185,000 105,000 290,000
Receivables 225,000 56,000 281,000
Furniture 175,000 135,000 75,000 15,000 370,000
Investment in S 680,000 0 550,000 0
130,000
Land 474,000 60,000 100,000 634,000
Equipment (net) 925,000 272,000 3,000 30,000 1,170,000
Goodwill 0 0 55,000 55,000
Total Assets 2,664,000 628,000 2,800,000
Liabilities 771,000 136,000 907,000
Common stock 400,000 100,000 100,000 400,000
Retained earnings 1,493,000 392,000 475,000 83,000 1,493,000
Total 2,664,000 628,000 808,000 808,000 2,800,000
