Peak Entertainment acquires all of the stock of Saddlestone Inc. on January 1, 2020. In preparing to consolidate the trial balances of Peak and Saddlestone at December 31, 2021 (two years after the acquisition), you assemble the following information:
Date-of-acquisition information:
• Value of stock given up to acquire Saddlestone: $20,000,000.
• Direct merger costs: $250,000.
• Saddlestone’s shareholders’ equity: $7,200,000, consisting of capital stock, $2,000,000; retained earnings, $5,000,000; accumulated other comprehensive income, $200,000.
• Fair value of earnings contingency agreement to be paid in cash: $300,000.
• Fair value of previously unrecorded identifiable intangibles (5-year life): $2,000,000. There are no revaluations of Saddlestone’s reported net assets.
Information for 2020 and 2021:
• Saddlestone’s reported net income for 2020: $3,000,000; for 2021: $3,500,000.
• Saddlestone’s reported other comprehensive income for 2020: $100,000 net income; for 2021: $25,000 net loss.
• Saddlestone declared and paid dividends of $1,000,000 each year.
• Goodwill and identifiable intangibles are not impaired in 2020; goodwill is impaired by $200,000 in 2021.
Required
a. Prepare the 2020 and 2021 journal entries made by Peak to record its investment, using the complete equity method.
Enter numerical answers using all zeros (do not abbreviate in thousands or in millions).
Description Debit Credit
Investment in Saddlestone Answer Answer
AnswerAccumulated OCICashContingent consideration liabilityEquity in net income of SaddlestoneEquity in OCI(L) of SaddlestoneGoodwillGoodwill impairment lossInvestment in SaddlestoneMerger expenses Answer Answer
AnswerAccumulated OCICashContingent consideration liabilityEquity in net income of SaddlestoneEquity in OCI(L) of SaddlestoneGoodwillGoodwill impairment lossInvestment in SaddlestoneMerger expenses Answer Answer
Capital stock
Answer Answer
Cash
Answer Answer
To record acquistion of Saddlestone.
AnswerAccumulated OCICashContingent consideration liabilityEquity in net income of SaddlestoneEquity in OCI(L) of SaddlestoneGoodwillGoodwill impairment lossInvestment in SaddlestoneMerger expenses Answer Answer
Equity in net income of Saddlestone Answer Answer
AnswerAccumulated OCICashContingent consideration liabilityEquity in net income of SaddlestoneEquity in OCI(L) of SaddlestoneGoodwillGoodwill impairment lossInvestment in SaddlestoneMerger expenses Answer Answer
To record equity in net income and OCI(L) for 2020.
AnswerAccumulated OCICashContingent consideration liabilityEquity in net income of SaddlestoneEquity in OCI(L) of SaddlestoneGoodwillGoodwill impairment lossInvestment in SaddlestoneMerger expenses Answer Answer
AnswerAccumulated OCICashContingent consideration liabilityEquity in net income of SaddlestoneEquity in OCI(L) of SaddlestoneGoodwillGoodwill impairment lossInvestment in SaddlestoneMerger expenses Answer Answer
To record receipt of dividends for 2020.
Investment in Saddlestone Answer Answer
AnswerAccumulated OCICashContingent consideration liabilityEquity in net income of SaddlestoneEquity in OCI(L) of SaddlestoneGoodwillGoodwill impairment lossInvestment in SaddlestoneMerger expenses Answer Answer
AnswerAccumulated OCICashContingent consideration liabilityEquity in net income of SaddlestoneEquity in OCI(L) of SaddlestoneGoodwillGoodwill impairment lossInvestment in SaddlestoneMerger expenses Answer Answer
To record equity in net income and OCI(L) for 2021.
AnswerAccumulated OCICashContingent consideration liabilityEquity in net income of SaddlestoneEquity in OCI(L) of SaddlestoneGoodwillGoodwill impairment lossInvestment in SaddlestoneMerger expenses Answer Answer
AnswerAccumulated OCICashContingent consideration liabilityEquity in net income of SaddlestoneEquity in OCI(L) of SaddlestoneGoodwillGoodwill impairment lossInvestment in SaddlestoneMerger expenses Answer Answer
To record receipt of dividends for 2021.
b. Prepare the consolidation eliminating entries made at December 31, 2021.
Enter numerical answers using all zeros (do not abbreviate in thousands or in millions).
Ref. Description Debit Credit
(C) AnswerAccumulated OCICashContingent consideration liabilityEquity in net income of SaddlestoneEquity in OCI(L) of SaddlestoneGoodwillGoodwill impairment lossInvestment in SaddlestoneMerger expenses Answer Answer
AnswerAccumulated OCICashContingent consideration liabilityEquity in net income of SaddlestoneEquity in OCI(L) of SaddlestoneGoodwillGoodwill impairment lossInvestment in SaddlestoneMerger expenses Answer Answer
Dividends-Saddlestone
Answer Answer
Investment in Saddlestone
Answer Answer
(E) Capital stock Answer Answer
Retained earnings Answer Answer
AnswerAccumulated OCICashContingent consideration liabilityEquity in net income of SaddlestoneEquity in OCI(L) of SaddlestoneGoodwillGoodwill impairment lossInvestment in SaddlestoneMerger expenses Answer Answer
AnswerAccumulated OCICashContingent consideration liabilityEquity in net income of SaddlestoneEquity in OCI(L) of SaddlestoneGoodwillGoodwill impairment lossInvestment in SaddlestoneMerger expenses Answer Answer
(R) Identifiable intangibles Answer Answer
AnswerAccumulated OCICashContingent consideration liabilityEquity in net income of SaddlestoneEquity in OCI(L) of SaddlestoneGoodwillGoodwill impairment lossInvestment in SaddlestoneMerger expenses Answer Answer
AnswerAccumulated OCICashContingent consideration liabilityEquity in net income of SaddlestoneEquity in OCI(L) of SaddlestoneGoodwillGoodwill impairment lossInvestment in SaddlestoneMerger expenses Answer Answer
(O) Amortization expense Answer Answer
AnswerAccumulated OCICashContingent consideration liabilityEquity in net income of SaddlestoneEquity in OCI(L) of SaddlestoneGoodwillGoodwill impairment lossInvestment in SaddlestoneMerger expenses Answer Answer
Indentifiable intangibles
Answer Answer
AnswerAccumulated OCICashContingent consideration liabilityEquity in net income of SaddlestoneEquity in OCI(L) of SaddlestoneGoodwillGoodwill impairment lossInvestment in SaddlestoneMerger expenses Answer Answer
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