A summary of the 2011 balance sheet of Alsop, Ltd., follows:
On January 1, 2011, Alsop acquired 100 percent of the outstanding common stock of Martin Monthly for $62,000 cash. At the time of the acquisition, the fair market values of the assets and liabilities of Martin were $86,000 and $64,000, respectively. During 2011, Martin operated as a subsidiary of Alsop; it recognized $15,000 of net income and paid a $10,000 dividend.
a. Account for the acquisition as a purchase. Provide the journal entry to record the acquisition, and prepare Alsop’s consolidated balance sheet as of January 1, 2011.
b. Account for the acquisition using the equity method. Provide the journal entry to record the acquisition, and prepare Alsop’s balance sheet as of January 1, 2011.
c. Compute the debt/equity ratios produced by the two methods of accounting for this investment. Explain why Alsop’s management might wish to use the equity method instead of preparing consolidated financial statements.