On January 1, 2011, Top Company acquired all of Bottom Company’s outstanding common stock for

$842,000 in cash. As of that date, one of Bottom’s buildings with a 12-year

remaining life was undervalued on its financial records by $72,000.
Equipment with a 10-year life was undervalued, but only by $10,000. The
book values of all of Bottom’s other assets and liabilities were equal to their
fair values at that time except for an unrecorded licensing agreement with
an assessed value of $40,000 and a 20-year remaining useful life. Bottom’s
book value at the acquisition date was $720,000.

During 2011, Bottom reported net income of $100,000 and paid $30,000
in dividends. Earnings were $120,000 in 2012 with $20,000 in dividends
distributed by the subsidiary. As of December 31, 2013, the companies
reported the following selected balances, which include all revenues and
expenses for the year:
Top's Investment Account Balance
determine
1. initial value assigned $842,000
2. the income accrual
3. dividend payments
4. amortization of excess acquisition-date fair value over book value

Step 1
Allocation of Bottom's acquisition-date fair value
Fair value of consideration transferred by TOP $ 842,000
Book value of Bottom, 1/1/11 $ (720,000)
Excess fair value over book value $ 122,000

amortization to specific accounts life (yrs) Annual Amortization

Buildings $ 72,000 12 $ 6,000
Equipment $ 10,000 10 $ 1,000
Licensing agreement $ 40,000 20 $ 2,000
Totals $ 122,000 $ 9,000

Investment Account of Bottom Dec., 2013

Initial value (fair value of consideration transferred by Top
Bottom co. 2011-2012 increase book value(income less dividend)
100,000+120,000-30,000-20,000
Excess amortization for 2011-2012 (9,000 x 2 yrs)
Current yr recognition 2013:
Equity income accrual (Bottom revenue less its expenses)
Excess amortization expenses
Dividends from Bottom
Investment in Bottom Co, 12/31/13

120,000 income accrual and 9,000 excess amortization expenses--indicate an Equity in Subsidiary Earnings balance of $111,00
appears on Top's income statement for current period

Cosolidated Totals of Accounts

Buildings 1540+460-72+18 2054000
Equipment 280+200-10+3 $ 487,000
Land 330+250 $ 580,000
Depreciation Exp 100+60+6+1 $ 167,000
Amortization Exp 40-2 $ 2,000
Revenues 900+300 120000
Net Income 1200000-exp(620+167+2) $ 411,000
Investment in Bottom $ -
Dividends Paid $ 70,000
COGS 500+120 $ 620,000
Worksheet Entries
Entry S
Common stock(bottom) $ 400,000
Retained Earnings, 1/1/13 $ 490,000
Bottom Co. $ 890,000
To eliminate subsidiary beginning stockholders equity accounts against book
Enrty A
Buildings $ 60,000
Equipment $ 8,000
Licensing agreement $ 36,000
Investment in Bottom $ 104,000
To recognize fair-value allocaations to sub assets in excess book value. 2 yr allocation2011-2013
Entry I
Equity in subsidiary Earnings $ 111,000
investment in Bottom $ 111,000
To eliminate parent equity income accrual, balance is computed in step 1
Entry D
investment in Bottom $ 10,000
Dividends paid $ 10,000
To eliminate intra-entity dividend payment made by the sub to the parent
(and recorded as a reduction in the investment account because the equitymethod is used)
Entry E
Depreciation expense $ 7,000
Amortization Expense $ 2,000
Equipment $ 1,000
Buildings $ 6,000
Licensing agreement $ 2,000
To recognize excess fair-value depreciation and amortization for 2013
013
$ 842,000

$ 170,000
$ (18,000)

$ 120,000
$ (9,000)
$ (10,000) $ 101,000
$ 1,095,000

ubsidiary Earnings balance of $111,000

the investment in Bottom account retains original value $842,000.
The parent recognizes only the intra-entity dividend of $10,000 as income in 2013.
amortization to specific accounts life (yrs) Annual Amortization
Buildings $ 72,000 12 $ 6,000
Equipment $ 10,000 10 $ 1,000
Licensing agreement $ 40,000 20 $ 2,000
Totals $ 122,000 $ 9,000

Cosolidated Totals of Accounts

Buildings 1540000+460000+72000-18000 2,054,000 *6,000 x 3 yrs = 18,000 amortization
Equipment280+200-10+3= 487000 *1000 x 3 yrs = 3000 amort.
Land 330+250 580000 book and fair value are same, no allocation
Depreciation Exp 100+60+6+1 167000 *add both expenses together plus dep. From above
Amortization Exp 2000 * from above
Revenues 900+300 1200000
Net Income 1200000-exp(620+167+2) 411000
Investment in Bottom 0 *amt is removed so no balance is reported
Dividends Paid 70000 *only reports Top's, Bottom's is deleted because its an
COGS 500+120 620000

Worksheet Entries
Entry S
Common stock(bottom) $ 400,000
Retained Earnings, 1/1/13 $ 490,000
Bottom Co. $ 890,000
To eliminate subsidiary beginning stockholders equity accounts against book
Enrty A
Buildings $ 60,000
Equipment $ 8,000
Licensing agreement $ 36,000
Investment in Bottom $ 104,000
To recognize fair-value allocaations to sub assets in excess book value. 2 yr allocation2011-2013
Entry I
Equity in subsidiary Earnings $ 111,000
investment in Bottom $ 111,000
To eliminate parent equity income accrual, balance is computed in step 1
Entry D
investment in Bottom $ 10,000
Dividends paid $ 10,000
To eliminate intra-entity dividend payment made by the sub to the parent
(and recorded as a reduction in the investment account because the equitymethod is used)
Entry E
Depreciation expense $ 7,000
Amortization Expense $ 2,000
Equipment $ 1,000
Buildings $ 6,000
Licensing agreement $ 2,000
To recognize excess fair-value depreciation and amortization for 2013
Entry C
investment in Bottom 152000
Retained earnings, 1/1/13 152000
To convert to the equity method by accruing the net effect of the sub operations
(income less dividends)for prior 2 yrs(170,000)along with amortization exp
(18,000) for the same period
Entry I
Dividend income 10000
Dividend paid 10000
To eliminate intra-entity dividend payments recorded by parent as income
o allocation
lus dep. From above

is reported
deleted because its an intra-entity
 Investment Account of Bottom Dec., 2013
Initial value (fair value of consideration transferred by Top
Dividends from Bottom $ (10,000)
Investment in Bottom Co., 12/31/13
$ 842,000

$ 832,000