CASE 5–1: Accounting Entries for Consolidation of Inter corporate 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.
