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Advanced Financial Accounting (12th Edition) See all exercises

Chapter 4, End of Chapter, Problems, Exercise P4–30

Part a Part b

Here is the step-by-step explanation, verified by an educator:

Step 1 of 3

Global Explanation:
 
Journal entry records the day-to-day transactions and events of the business by debiting and crediting the respective accounts.
 
Prepare the consolidation entry in the books of Corporation P for 20X9, February 12.
 
The first journal entry is a debit to the investment in Company S for $268,000 and credit to the cash and gain on bargain
purchase for $251,000 and $17,000 respectively to record the initial investment in Company S.
 
The second journal entry is a debit to common stock and retained earnings for $80,000 and $175,000 respectively and credit to
investment in Company S for $255,000 to record the basic consolidation entry.
 
The last journal entry is a debit to land for $20,000 and credit to inventories and investment in Company S for $7,000 and
$13,000 respectively to record the excess value (differential) reclassification entry.
 
Step 1:
 
Calculate the fair value of net assets of Company S (Fair Value of Net AssetsS) by adding the land appreciation (LandAppreciation)
of $20,000 and subtracting the depreciated inventories (InventoriesDepreciated) of $7,000 from the book value of Company S
(Book ValueS) of $255,000.
 
The fair value of net assets of Company S is the initial investment value in Company S.

Fair Value of Net AssetsS = Book ValueS + LandAppreciation − InventoriesDepreciated

​ ​ ​ ​

​
= $255, 000 + $20, 000 − $7, 000 ​

= $268, 000

Step 2 of 3

Compute the gain on bargain purchase by subtracting the acquisition price of $251,000 from the fair value of net assets of
Company S (Fair Value of Net AssetsS) of $268,000.

Gain on Bargain Purchase = Fair Value of Net AssetsS − Acquisition Price

​

= $268, 000 − $251, 000

​ ​

= $17, 000
 Step 3 of 3

Determine the investment in Company S differential (Investment in Company SDifferential) by subtracting the depreciated
inventories (InventoriesDepreciated) of $7,000 from the land appreciation (LandAppreciation) of $20,000.

Investment in Company SDifferential = LandAppreciation − InventoriesDepreciated

​ ​ ​

= $20, 000 − $7, 000

​ ​

= $13, 000

Final answer 숥

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쇲 P, Ex P4–29 P, Ex P4–31 쇰

All Textbook Solutions / Accounting / Advanced Financial Accounting (12th Edition) / Ch 4, End of Chapter, Ex P4–30
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