Pequity Company purchased 85% of the common stock of Sequity Company on April 1, Year 1 for

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Pequity Company purchased 85% of the common stock of Sequity Company on April 1, Year 1 for total consideration of $545,000 cash plus $50,000 of contingent consideration as measured according to GAAP at fair value. Both companies have a December 31 year-end. December 31, Year 1, trial balances for Pequity and Sequity were:

Pequity Company purchased 85% of the common stock of Sequity

Sequity Company declared a $50,000 cash dividend on December 20, Year 1, payable on January 10, Year 2, to stockholders of record on December 31, Year 1. Pequity Company recognized the dividend on its declaration date. Pequity includes dividend income receivable in the accounts receivable account.
On the acquisition date, the book values and fair values of Sequity's assets and liabilities were equal with the following exceptions.

Pequity Company purchased 85% of the common stock of Sequity

Any difference between book value and fair value for property and equipment is depreciated over seven years. Depreciation expense is reported on the income statement in selling, general, and administration expense. The entire amount of inventory acquired was sold in Year 1.
No payments were made for the earn-out at the end of year 1, and the adjustment to contingent consideration included only interest adjustments (no change in fair value was expected since the actual and target levels for revenue were equal at the end of year 1).
Both companies report depreciation expense as a component of Selling, General, and Administration expense on the income statement. For the year ending December 31, Year 1, Pequity and Sequity reported depreciation expense of $96,000 and $72,000, respectively. Both companies use straight-line and use the full-year option in computing depreciation expense (i.e., they take a full year's depreciation on any asset acquired during the year). The following balance sheet is available for both companies at the beginning of the year of acquisition and the acquisition date.

Pequity Company purchased 85% of the common stock of Sequity

Required:
1. Prepare a consolidated workpaper at the end of year 1.
2. Prepare a consolidated statement of cash flows for year 1 (see Chapter 4 for a review of the consolidated statement of cash flows).
3. Prepare the journal entry on the books of Pequity to account for the change in the contingent consideration liability for year 1.

GAAP
Generally Accepted Accounting Principles (GAAP) is the accounting standard adopted by the U.S. Securities and Exchange Commission (SEC). While the SEC previously stated that it intends to move from U.S. GAAP to the International Financial Reporting Standards (IFRS), the...
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Related Book For  book-img-for-question

Advanced Accounting

ISBN: 978-1119119364

6th edition

Authors: Debra Jeter, Paul Chaney

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