U 5 | Business & Finance homework help

 

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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.