CASE 5–1: Accounting Entries for Consolidation of Intercorporate Investments
Axel Corporation acquires 100% of the stock of Wheal Company on December 31, Year 4. The following information pertains to Wheal Company on the date of acquisition:
|
|
|
Book Value |
Fair Value |
|
Cash |
|
40,000 |
40,000 |
|
Accounts Receivable |
|
60,000 |
55,000 |
|
Inventory |
|
50,000 |
75,000 |
|
Property Plant and Equipment (net) |
|
100,000 |
200,000 |
|
Secret formula (patent) |
|
– |
30,000 |
|
Total Assets |
|
250,000 |
400,000 |
|
|
|
|
|
|
Accounts Payable |
|
30,000 |
30,000 |
|
Accrued Employee pensions |
|
20,000 |
22,000 |
|
Long Term Debt |
|
40,000 |
38,000 |
|
Capital Stock |
|
100,000 |
– |
|
Other Contributed Capital |
|
25,000 |
– |
|
Retained Earnings |
|
35,000 |
– |
|
Total Liabilities and Equity |
|
250,000 |
90,000 |
Axel Corporation issues $110,000 par value ($350,000 market value on December 31, Year 4) of its own stock to the shareholders of Wheal Company to consummate the transaction, and Wheal Company becomes a wholly owned, consolidated subsidiary of Axel Corporation.
Required:
- a. Prepare journal entries for Axel Corp. to record the acquisition of Wheal Company stock assuming (1) pooling accounting and (2) purchase accounting.
- b. Prepare the worksheet entries for Axel Corp. to eliminate the investment in Wheal Company stock in preparation for a consolidated balance sheet at December 31, Year 4 assuming (1) pooling accounting and (2) purchase accounting.
CHECK
(b) Cr. Investment in Wheal for $110,000 in (1), and $350,000 total in (2)
- c. Calculate consolidated retained earnings at December 31, Year 4 (Axel’s retained earnings at this date are $150,000), assuming:
- (1) Axel Corp. uses the pooling method for this business combination.
- (2) Axel Corp. uses the purchase method for acquisition of Wheal Company.
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