Let's solve the problem step by step: --- ### **Step 1: Entry to Record the Investment on Parent's Books** **Parent issues 28,000 shares of its stock (par $2, fair value $10/share).** **Journal Entry:** - **Investment in Subsidiary** = 28,000 shares × $10 = **$280,000** - **Common Stock** = 28,000 × $2 = **$56,000** - **Paid-in Capital in Excess of Par** = $280,000 − $56,000 = **$224,000** **Entry:** ```plaintext Dr. Investment in Subsidiary 280,000 Cr. Common Stock 56,000 Cr. Paid-in Capital in Excess of Par 224,000 ``` **Explanation:** The parent records the investment at the fair value of the shares issued ($280,000), split into common stock at par and additional paid-in capital. --- ### **Step 2: Prepare the [E] Entry (Elimination of Equity Accounts)** **Subsidiary’s equity at acquisition:** - Common Stock: **$56,000** - Retained Earnings: **$140,000** - Total Equity: **$196,000** **[E] Entry:** ```plaintext Dr. Common Stock (S) 56,000 Dr. Retained Earnings (S) 140,000 Cr. Investment in Subsidiary 196,000 ``` **Explanation:** The [E] entry eliminates the subsidiary's equity accounts against the parent's investment account. --- ### **Step 3: Prepare the [A] Entry (Allocation of Excess to Identifiable Net Assets and Goodwill)** **Total Consideration Transferred:** - $280,000 (investment recorded in Step 1) **Subsidiary’s Net Book Value Acquired:** - $196,000 (from Step 2) **Excess Paid Over Book Value:** - $280,000 − $196,000 = **$84,000** **Fair Value Adjustment for PPE:** - FV of PPE: $182,000 - BV of PPE: $98,000 - Excess FV over BV: $182,000 − $98,000 = **$84,000** **Thus, all excess is attributable to PPE. No goodwill!** **[A] Entry:** ```plaintext Dr. PPE (Asset Adjustment) 84,000 Cr. Investment in Subsidiary 84,000 ``` **Explanation:** The [A] entry allocates the entire excess of purchase price over book value to the undervalued PPE. --- ## **Final Answers:** ### **a. Parent's Entry to Record the Investment:** ```plaintext Dr. Investment in Subsidiary 280,000 Cr. Common Stock 56,000 Cr. Paid-in Capital in Excess of Par 224,000 ``` ### **b. Consolidation [E] and [A] Entries:** #### **[E] Entry:** ```plaintext Dr. Common Stock (S) 56,000 Dr. Retained Earnings (S) 140,000 Cr. Investment in Subsidiary 196,000 ``` #### **[A] Entry:** ```plaintext Dr. PPE (Asset Adjustment) 84,000 Cr. Investment in Subsidiary 84,000 ``` --- **Summary Explanation:** - **Step 1:** The parent records the investment at the fair value of shares issued. - **Step 2:** The subsidiary's equity is eliminated against the parent's investment. - **Step 3:** The excess paid is allocated entirely to the undervalued PPE, with no goodwill arising.