As SP6, you prepare the worksheet for this problem. You can use the posted excel worksheet which has been started and shows totals for the debits and credits in the consolidating entries columns. We'll start the problem here so you will have all the data you need.
In this problem, the author is trying to confuse us by giving the acquisition date as December 31. We'll treat it as if it were one day later, on January 1 and call that year one. The consolidation year is January to December of the second year. There would have been just one previous year of ownership and we're in the second year.
The parent acquired 90% of the subsidiary for $603,000 and the noncontrolling interest at acquisition fair value is given as $67,000 so the total fair value of the subsidiary at acquisition is $670,000
There's no control premium. 90% of the total fair value is exactly the parent's consideration. part a - acquisition date fair value allocations
It appears they are giving us all the pieces of the subsidiary's balance sheet at acquisition which adds up to $460,000. The items that need to be analyzed separately, because fair value differs from book value, are land, buildings, equipment, patents, and notes payable. Everything else in this case is just the current assets.
The fair value of the identifiable assets and liabilities is less than the overall fair value, providing Goodwill of $90,000. Then, the difference between the fair value and book value is $210,000. The annual amortization given the remaining lives of the various assets and liabilities that have been revalued is calculated and shown.
This is the information for the E entry, to prepare the current year's amortization, and also for the A entry. The A entry will be at the start of the second year so there would have been one previous year's amortization removed from the acquisition date fair value adjustments.
part b - how is the parent tracking its investment?
We don't have financial statements here, we just have trial balances. We can see that the investment on the parent's books is different than the initial value of $603,000 and that the parent's investment income is more than all of the subsidiary's dividends. The parent is not using the initial value method.
From the subsidiary's trial balance, we can figure that the subsidiary's income (revenues less CGS less depreciation less interest) is $120,000. If the parent were using the partial equity method, it would recognize just 90% of this reported net income as investment income. That's $108,000 and that's what the parent is recognizing. The parent is using the partial equity method.
A *C entry will be needed because the parent is not using the equity method and this is not the first year.
The *C entry will reduce the parent's investment account and retained earnings because the parent slightly overstated its share of the subsidiary's income in the previous year in comparison to the full equity method. The parent recognized its share of the subsidiary's reported income but did not reduce that by its share of the amortization. Its share of the $15,000 of amortization would have been 90%, or $13,500.
Another piece of information you will need to complete the worksheet is the noncontrolling interest's share of the subsidiary's net income for the current year.
We have already shown that the subsidiary reported $120,000 of net income and that amortization is $15,000. This means the subsidiary's income adjusted for the consolidated perspective is $105,000. The noncontrolling interest 10% share would be $10,500.