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Branson paid $465,000 cash for all of the outstanding common stock of Wolf pack, Inc., on January 1, 2011. On that date, the subsidiary had a book value of $340,000 (common stock of $200,000 and retained earnings of $140,000), although various unrecorded royalty agreements were assessed at a $100,000 fair value. The royalty agreements had an estimated 10-year remaining useful life. In negotiating the acquisition price, Branson also promised to pay Wolf pack’s former owners an additional $50,000 if Wolf pack’s income exceeded $120,000 total over the first two years after the acquisition. At the acquisition date, Branson estimated the probability adjusted present value of this contingent consideration at $35,000. On December 31, 2011, based on Wolf pack’s earnings to date, Branson increased the value of the contingency to $40,000. During the subsequent two years, Wolf pack reported the following amounts for income and dividends:
Net Income
Dividends Paid
2011
$65,000
$25,000
2012
75,000
35,000
In keeping with the original acquisition agreement, on December 31, 2012, Branson paid the additional $50,000 performance fee to Wolf pack’s previous owners.
Using the acquisition method and assuming no goodwill impairment charges, prepare each of the following:
a. Branson’s entry to record the acquisition of the shares of its Wolf pack subsidiary.
b. Branson’s entries at the end of 2011 and 2012 to adjust its contingent performance obligation for changes in fair value and the December 31, 2012, payment.
c. Consolidation worksheet entries as of December 31, 2012, assuming that Branson has applied the equity method.
d. Consolidation worksheet entries as of December 31, 2012, assuming that Branson has applied the initial value method.
