4.3 – Consolidation at End of First Year

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4.3 – Consolidation at End of First Year

Peak Entertainment acquired its 100-percent-owned subsidiary Saddlestone Inc. on January 1, 2011. In preparing to consolidate Peak and Saddlestone at December 31, 2011, you assemble the following information:

                Value of stock given up to acquire Saddlestone: $10,000,000.

                Direct merger costs: $250,000.

Saddlestone’s stockholder’s equity at acquisition: $7,200,000.

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

Goodwill and identifiable intangibles are not impaired in 2011.

Saddlestone’s net income in 2011: $3,000,000.

Saddlestone’s dividends paid in 2011: $1,000,000.

Required

a.)      Prepare the 2011 journal entries made by Peak to record the acquisition and calculate and record the equity method income accrual, using the complete equity method.

b.)     Prepare the consolidation eliminating entries made at December 31, 2011.