On 1/1/20x1, Petwoud Company exchanged 25,000 shares of its $1 par value common stock and $150,000 cash to acquire 80% of the outstanding voting common stock of Supagud, Inc. At the acquisition date, the fair value of Petwoud Company’s common stock was $20 per share. Petwoud’s payment includes a control premium of $15,000.
Other investors, unrelated to Petwoud Company, hold the remaining 20% of the outstanding common stock of Supagud.
After the acquisition, Supagud, Inc. will continue as a separate operating company. In its separate accounting records, Petwoud Company will apply the equity method to account for their investment in Supagud.
The pre-acquisition trial balance for Supagud at 1/1/20x1 was:
Cash
|
50,000
|
|
Accounts receivable
|
125,000
|
|
Other current assets
|
105,000
|
|
Buildings
|
510,000
|
|
Land
|
217,000
|
|
Accounts Payable
|
|
35,000
|
Long-term debt
|
|
300,000
|
Common stock
|
|
420,000
|
Retained earnings
|
|
252,000
|
At the acquisition date, Supagud’s building had a fair value of $538,000 and they controlled an unrecorded patent with a fair value of $80,000. The book value of all other assets and liabilities of Supagud were equal to the relate fair values. At 1/1/20x1, the remaining useful lives of the building and the unrecorded patent were 10 years and 20 years, respectively.
Supagud’s 20x1 net income and dividends were:
Net income
|
$75,000
|
Dividends declared and paid
|
$30,000
|
Supagud did not issue any common stock during fiscal year 20x1.
Required
- Prepare the journal entry to record Petwoud Company’s investment in Supagud, Inc. at 1/1/20x1.