Reference no: EM133415899

Question 1

On January 1, 2022, ABC obtained 100% of the common shares of XYZ by issuing 12,500 shares of its own common stock, which had a par value of $5 and a market value of $15 on that date.

XYZ reported net assets of $150,000 and its shares had a fair value of $20 per share at that date. However, some of the fixed assets (with a remaining useful life of 5 years) were undervalued by $20,000 in the company's accounting records.

XYZ had also developed a list of customers with an estimated fair value of $10,000 and a remaining life of 10 years.

ABC Company uses the equity method to account for its investment in XYZ. During 2022, ABC and XYZ reported the following:

ABC XYZ

Net Income $300,000 $200,000

Dividends declared and paid 25,000 15,000

Required:

Prepare each of the journal entries listed below related to ABC's investment in XYZ.

1- The acquisition of 100% of the shares of XYZ.

2- ABC's share of XYZ's net income in 2022.

3- ABC's share of XYZ dividends in 2022.

4- Amortization of excess acquisition.

Question 2

On January 1, 2022, ABC acquired 80% of XYZ voting shares for $200,000.

As of that date, XYZ reported in its equity section of the balance sheet common shares outstanding of $75,000 and retained earnings of $150,000.

The fair value of the non-controlling interest was $50,000 on the acquisition date.

The excess paid by ABC related to XYZ equipment that had a fair value of $25,000 above book value and a remaining economic life of 8 years at the date of the business combination.

At the end of 2022, ABC reported net income of $40,000 and paid dividends of $20,000.

At the end of 2022, XYZ reported net income of $50,000 and paid dividends of $20,000.

Required:

1) Provide the journal entries recorded by ABC during 2020 in its books if you account for your investment in SXYZ using the equity method.

2) Provide the necessary consolidation entries as of December 31, 2022 to prepare consolidated financial statements of ABC and subsidiaries.