Answered: Net Income Dividends Declared 2017…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Branson paid $465,000 cash for all of the outstanding common stock of Wolfpack, Inc., on January 1, 2017. On that date, the subsidiary had a book value of $340,000 (common stock of $200,000 and retained earnings of $140,000), although various unrecorded royalty agreements (10-year remaining life) were assessed at a $100,000 fair value. Any remaining excess fair value was considered goodwill.

In negotiating the acquisition price, Branson also promised to pay Wolfpack’s former owners an additional $50,000 if Wolfpack’s income exceeded $120,000 total over the first two years after the acquisition. At the acquisition date, Branson estimated the probability-adjusted present value of this contingent consideration at $35,000. On December 31, 2017, based on Wolfpack’s earnings to date, Branson increased the value of the contingency to $40,000.

During the subsequent two years, Wolfpack reported the following amounts for income and dividends:

In keeping with the original acquisition agreement, on December 31, 2018, Branson paid the additional $50,000 performance fee to Wolfpack’s previous owners.

Prepare each of the following:

a. Branson’s entry to record the acquisition of the shares of its Wolfpack subsidiary.

b. Branson’s entries at the end of 2017 and 2018 to adjust its contingent performance obligation for changes in fair value and the December 31, 2018, payment.

c. Consolidation worksheet entries as of December 31, 2018, assuming that Branson has applied the equity method.

d. Consolidation worksheet entries as of December 31, 2018, assuming that Branson has applied the initial value method.

Net Income
Dividends Declared
2017
$65,000
75,000
$25,000
35,000
2018

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