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 (b) Cr. Investment in for a consolidated balance sheet at December 31, Year 4 assuming (1) pooling accounting and (2) purchase Wheal for $110,000 in (1), accounting.

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.

Answer rating: 100% (QA)

step 1 of 8 Purchase Method The purchase method has been adopted by US GAAP for consolidation purposes in year 2001 under statement number 141 Under t... View the full answer