Question

A parent company exchanges 5,000 shares of its $2 par value common stock, with a market value of $10/share, for all of the shares owned by the subsidiary's shareholders, resulting in a $50,000 total purchase price. On the acquisition date, the subsidiary reported a book value of Stockholders' Equity of $37,500, comprised of $15,000 of Common Stock and $22,500 of Retained Earnings. An examination of the subsidiary's balance sheet revealed that book values were equal to fair values for all assets except for PPE (net), which has a book value of $20,000 and a fair value of $32,500.
a. Prepare the entry that the parent makes to record the investment.
b. Prepare the [E] and [A] consolidation entries.

Answer 1

Answer:

a. The entry that the parent makes to record the investment

Investment in Subsidiary $50,000 (debit)

Common Stocks $50,000 (credit)

b. Consolidation Entries

Common Stock (Subsidiary) $15,000 (debit)

Retained Earnings (Subsidiary) $35,000 (debit)

Investment in Subsidiary $50,000 (credit)

Explanation:

The entry that the parent makes to record the investment

Investment in Subsidiary $50,000 (debit)

Common Stocks $50,000 (credit)

Recognize the Investment in Subsidiary and recognize the Equity element : Common Stocks

Consolidation Entries

Common Stock (Subsidiary) $15,000 (debit)

Retained Earnings (Subsidiary) $35,000 (debit)

Investment in Subsidiary $50,000 (credit)

Eliminate Common Items and recognize Goodwill or Gain on Bargain  Purchase if any.