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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.