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A parent company exchanges 30,000 shares of its $1 par value common stock, with a market value of $10/share, for all of the shares owned by the subsidiary's shareholders, resulting in a $300,000 total purchase price. On the acquisition date, the subsidiary reported a book value of Stockholders' Equity of $225,000, comprised of $90,000 of Common Stock and $135,000 of Retained Earnings. An examination of the subsidiary's balance sheet revealed that book values were equal to fair values for all assets except for PPE (net), which has a book value of $120,000 and a fair value of $195,000.

Required:
Prepare the entry that the parent makes to record the investment.

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Answer:

Common Stock $90,000 (debit)

Retained Earnings $135,000 (debit)

Revaluation Reserve $75,000 debit)

Investment in Subsidiary $300,000 (credit)

Explanation:

The Parent (Investor) acquires the Assets and Liabilities (or Equity) of the Subsidiary (Investee) at their Acquisition date fair values.

Any excess of the Purchase Consideration over the Net Assets/ Equity taken over is known as Goodwill and is shown in the Consolidated financial Statements of the Group.

The above shows the elimination journal entry that would be prepared at the acquisition date. The Revaluation reserve has been created to adjust the fair value of PPE. There is no goodwill.

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