Chapman Company obtains 100 percent of Abernethy Company’s stock on January 1, 2017. As of that...

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Accounting

Chapman Company obtains 100 percent of Abernethy Company’s stockon January 1, 2017. As of that date, Abernethy has the followingtrial balance:
Debit Credit
Accountspayable $ 50,000
Accountsreceivable $ 40,000
Additionalpaid-in capital 50,000
Buildings (net)(4-year remaining life) 120,000
Cash andshort-term investments 60,000
Commonstock 250,000
Equipment (net)(5-year remaining life) 200,000
Inventory 90,000
Land 80,000
Long-termliabilities (mature 12/31/20) 150,000
Retainedearnings, 1/1/17 100,000
Supplies 10,000
Totals $ 600,000 $ 600,000
During 2017, Abernethy reported net income of $80,000 whiledeclaring and paying dividends of $10,000. During 2018, Abernethyreported net income of $110,000 while declaring and payingdividends of $30,000.
Assume that Chapman Company acquired Abernethy’s common stockfor $500,000 in cash. Assume that the equipment and long-termliabilities had fair values of $220,000 and $120,000, respectively,on the acquisition date. Chapman uses the initial value method toaccount for its investment.

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4.2 Ratings (705 Votes)

Step 1 Determine Annual Excess Amortizations The value of annual excess amortizations is arrived as below Excess of Consideration Paid over Book Value 500000 50000 250000 100000 400000 This excess value of 100000 will get allocated and amortized as follows Remaining LifeMaturity Annual Excess Amortizations Equipment 220000 200000 20000 5 Years 4000 200005 LongTerm Liabilities 150000 120000 30000 4 Years 7500 300004 See Answer

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	Debit		Credit
Accountspayable			$	50,000
Accountsreceivable	$	40,000
Additionalpaid-in capital				50,000
Buildings (net)(4-year remaining life)		120,000
Cash andshort-term investments		60,000
Commonstock				250,000
Equipment (net)(5-year remaining life)		200,000
Inventory		90,000
Land		80,000
Long-termliabilities (mature 12/31/20)				150,000
Retainedearnings, 1/1/17				100,000
Supplies		10,000
Totals	$	600,000	$	600,000