Chapter 2-Consolidated Statements: Date of Acquisition: Multiple Choice

 

Chapter 2—Consolidated Statements: Date of Acquisition MULTIPLE CHOICE

1. Ac c ou nt Sales C o st o f G o o d s S o l d

In v e s t o r $500,000 23 0 ,0 00

I n ve st e e $300,000 17 0 ,00 0

Gross Profit S el l i n g & A d m i n . E x p e n s e s  Net Income Inco me

$270,000 12 0 ,0 00 $150 $1 50,0 ,000 00

$130,000 10 0 ,00 0 $ 30,00 30 ,00 0

50 , 0 0 0

10,000

Div ide nds pa id

Assuming Investor owns 70% of Investee. What is the amount that will be recorded as Net Income for the Controlling Interest? a. $164,000  b. $171 $1 71,0 ,000 00 c. $178,000 d. $180,000 ANS: B

a.  b. c. d.

DIF:

M

OBJ: 22 -1

2. Cons Consol olid idat ated ed fina financ ncia iall ssta tate teme ment ntss are are desi design gned ed to pr prov ovid ide: e: info inform rmat ativ ivee iinf nfor orma mati tion on to al alll ssha hare reho hold lder ers. s. the result r esultss of operation oper ations, s, cash c ash flow, f low, and the t he balance ba lance sheet shee t in an unders un derstanda tandable ble and informative manner for creditors. the results results of operat operation ions, s, ca cash sh flow flow,, and the balance balance sheet sheet as if the the p paren arentt and and subsi subsidiar diary y were a single entity. subs subsidi idiary ary inform informati ation on for the the ssub ubsid sidiar iary y sha shareh rehol older ders. s.

ANS: C

DIF:

M

OBJ: 22 -2

3. Con Conso soli lida date ted d ffin inanc ancia iall sta statem tement entss aare re ap appro propr pria iate te eve even n wit witho hout ut a majo majorit rity y ownership if which of the following exists: a. the the subsid subsidiar iary y has has the the right right to to appoi appoint nt m memb embers ers of of th thee parent parent comp company any's 's boar board d of directors.  b. the parent pare nt compa c ompany ny has h as the t he right righ t to appoint appo int a major m ajority ity of the t he members memb ers of the t he subsidiary's board of directors through a large minority voting interest. c. the the subsi subsidi diary ary o own wnss a larg largee minori minority ty vot voting ing inter interes estt in the the pare parent nt comp company any.. d. the parent parent company company has an abili ability ty to assume assume the the role of general general partner partner in a limite limited d  partnersh  part nership ip with wi th the t he approv a pproval al of o f the th e subsidi su bsidiary' ary'ss board bo ard of direc d irectors. tors. ANS: B

DIF:

M

OBJ: 22 -3

4. The The SEC SEC and and FASB FASB has has rec recom omme mend nded ed tha thatt a pare parent nt cor corpo pora rati tion on sho shoul uld d cons consol oliidate the financial statements of the subsidiary into its financial statements when it exercises control over the subsidiary, even without majority ownership. In which of the following situations would control NOT be evident? a. Access Access to sub subsid sidiar iary y ass assets ets is availa available ble to all shareh sharehold olders ers..  b. Dividend Divide nd policy po licy is set se t by the p paren arent. t. c. d.

The Th estanti subs suntiall bsidi idiary ary does eshnot not det determ ermine com pensa nsatio tion n for fo ithe s ma main inrollin empl employ ees. . olders. Substa Sub ally y all aldo l cash cas flows flows of the tine he subs scompe ubsidi idiary ary flow flow tor the tits cont control ling goyees shareh sh arehold ers.

ANS: A

DIF:

E

OBJ: 22 -3

 

a.  b. c. d.

5. Th Thee goal goal of the the co cons nsol olid idat atio ion n proc proces esss is fo for: r: asset asset acqui acquisit sition ionss and and 100% 100% stoc stock k acqui acquisit sition ionss to result result in the the ssame ame bala balance nce sheet. sheet. goodwill goodw ill to t o appear ap pear on the th e balanc ba lancee sheet she et of o f the th e consoli co nsolidate dated d entity. ent ity. the assets assets of of th thee noncon noncontrol trollin ling g in intere terest st to to be predomin predominatel ately y displ displayed ayed on the the balan balance ce sheet. the investm investment ent in the the subsi subsidiar diary y to to be properly properly valued valued on the the cons consolid olidated ated balance balance sheet.

ANS: A

DIF:

E

OBJ: 22 -4

6. A ssub ubsi sidia diary ry was acquir acquired ed for cash cash iin n a bu busin siness ess combin combinati ation on on Decemb December er 31, 20X1. The purchase price exceeded the fair value of identifiable net assets. The acquired company owned equipment equipment with a fair value in excess of the book value as of the date of the combination. A consolidated balance sheet prepared on December 31, 20X1, would a. report report the excess excess of the the fair fair v valu aluee over over the the book book value value of of the the equip equipmen mentt as part part of goodwill.  b. report repo rt the t he exces e xcesss of the fair valu valuee over ov er the t he book b ook value valu e of the equipmen equi pmentt as part of the t he  plantt aand  plan nd equip e quipmen mentt accoun ac count. t. c. reduce reduce reta retaine ined d earnin earnings gs fo forr the exce excess ss of the the fair fair value value of of the equ equipm ipment ent over over its its book book value. d. make make no adjus adjustme tment nt for for the exce excess ss of of the fair fair valu valuee of the the equipm equipment ent over over book book valu value. e. Instead, it is an adjustment to expense over the life of the equipment. ANS: B

DIF:

D

OBJ: 22 -5

7. Parr Parr Comp Compan any yp pur urch chas ased ed 100% 100% of the the voti voting ng comm common on stoc stock k of of Supe Superr Comp Compan any y for $2,000,000. There are no liabilities. The following book and fair values are available: Bo o k V al u e F a i r Va l u e Current assets $ 30 0 , 0 0 0 $600,000 L a n d a n d b u il d i n g 600,000 900,000 Ma c hi ne r y 500,000 600,000 G o o d wi l l 100,000 ? The machinery will appear on the consolidated balance sheet at ____. a. $560,000  b. $860 $8 60,0 ,000 00 c. $600,000 d. $900,000 ANS: C

DIF:

M

OBJ: 22 -5

8. Pagac Pagach h Com Compa pany ny purc purcha hase sed d 100 100% % of of the the vo voti ting ng commo common n sto stock ck of Ra Rage ge Comp Compan any y for $1,800,000. The following book and fair values are available: Book Value Fair Value Current assets $ 1 50 , 0 00 $3 0 0 ,0 0 0 L a n d a n d b u il d i n g 280,000 2 80 , 00 0 Ma c hi ne r y 400,000 7 00 , 00 0 B o n d s p ay ab l e ( 30 0 ,0 0 0) (2 5 0, 0 00 ) G o o d wi l l 150,000 ? The bonds payable will appear on the consolidated balance sheet a.  b. c.

at $300,00 $300 $300,0 ,000 00 (w (wit ha no premi premium or disc di000. scou ount nt sh show own) n).. at $300 ,000 0 le less ssith d disco iscount unt um of $50, $50,000. at $0; $0; aass sset etss aare re rec recor orde ded d net net of liab liabil ilit itie ies. s.

 

d. at an amou amount nt less less tthan han $2 $250 50,00 ,000 0 sin since ce it it is a barg bargai ain n purch purchase ase.. ANS: B DIF: M OBJ: 22 -5

a.  b. c. d.

9. The inves investme tment nt in a ssub ubsid sidiar iary y sho should uld be record recorded ed on th thee pare parent nt's 's bo books oks at th thee un under derly lying ing bo book ok va value lue of the the subsi subsidi diary ary's 's net asset assets. s. fair value v alue of o f the subsidiary's subsidia ry's net n et identifiabl ide ntifiablee asse assets. ts. fa fair ir va valu luee of of the the co cons nsid ider erat atio ion n giv given en.. fair fair value value of of the the consi consider derat ation ion given given plus plus an eest stima imate ted d value value for good goodwi will. ll.

ANS: C

DIF:

E

OBJ: 22 -6

10. Which Which of of the fol follow lowin ing g costs costs of of a busin business ess comb combin inati ation on can can be inc includ luded ed in in the value charged to paid-in-capital in excess of par? a. dire direct ct and and indi indire rect ct acqu acquis isit itio ion n cost costss  b. direct acquisitio a cquisition n costs c. direct direct acqu acquisi isitio tion n costs costs and and stock stock iss issue ue costs costs if stoc stock k is issu issued ed as as consid considera eratio tion n d. stoc stock k iss issue ue cos costs ts if st stoc ock k is is iiss ssue ued d as co cons nsid ider erat atio ion n ANS: D

DIF:

M

OBJ: 2 - 6

11. When When it pu purch rchase ased d Sutto Sutton, n, IInc. nc. on on Janua January ry 1, 1, 20X1 20X1,, Pavin Pavin Corp Corpora orati tion on issu issued ed 500,000 shares of its $5 par voting common stock. On that date the fair value of those shares totaled $4,200,000. Related to the acquisition, Pavin had payments to the attorneys and accountants of $200,000, and stock issuance fees of $100,000. Immediately prior to the purchase, the equity sections of the two firms appeared as follows: P av i n $ 4, 00 0 ,0 00 7,500,000 5,5 00 ,000 $1 7 , 0 0 0 ,0 0 0

C o m m o n s t o ck P a i d- i n c a p it a l i n e xc e s s o f p a r R e ta in e d e a r n i n g s T ot a l

Sutton $ 70 0, 00 0 900,000 5 00,0 00 $ 2 , 10 0 , 0 00

Immediately after the purchase, the consolidated balance sheet should report paid-in capital in excess of par of  a. $ 8, 9 0 0 ,0 0 0  b. $9, 100, 10 0,00 000 0 c. $ 9, 2 0 0 ,0 0 0 d. $ 9, 3 0 0 ,0 0 0 ANS: C

DIF:

M

OBJ: 22 -6

12. Judd Judd Co Compa mpany ny issu issued ed n nonv onvoti oting ng pref preferr erred ed stoc stock k with with a fair fair value value of $1,5 $1,500, 00,000 000 in exchange for all the outstanding common stock of the Bath Corporation. On the date of the exchange, Bath had tangible net assets with a book value of $900,000 and a fair value of $1,400,000. In addition, Judd issued preferred stock valued at $100,000 to an individual as a finder's fee for arranging the transaction. As a result of these transactions, Judd should report an increase in net assets of ____. a. $900,000  b. $1, 400, 40 0,00 000 0 c. $ 1, 5 0 0 ,0 0 0 d. $ 1, 6 0 0 ,0 0 0 ANS: C

DIF:

M

OBJ: 22 -6

13. In an an 80% 80% purch purchase ase accoun accounted ted for as a taxtax-fre freee excha exchange nge,, the the ex exces cesss of cost cost over over  book value val ue is i s $200,0 $2 00,000. 00. The equipme equi pment's nt's book value valu e ffor or tax purposes purp oses is $100, $ 100,000 000 and its fair fai r

 

value is $150,000. All other identifiable assets and liabilities have fair values equal to their book values. The tax rate is 30%. What is the total deferred tax liability that should be recognized on the consolidated balance sheet on the date of purchase? a. $12,000  b. $60, $6 0,00 000 0 c. $72,857 d. $85,714 ANS: D

DIF:

D

OBJ: 22 -6

14. On June June 30 30,, 20X1, 20X1, Naeder Naeder Corpor Corporati ation on purcha purchased sed for cash cash at $10 per share share all all 100,000 shares of the outstanding common stock of the Tedd Company. The total fair value of all identifiable net assets of Tedd was $1,400,000. The only noncurrent asset is property with a fair value of $350,000. The consolidated balance sheet of Naeder and its wholly owned subsidiary on June 30, 20X1, should report a. a retai retained ned earnin earnings gs bal balanc ancee that that is is iincl nclusi usive ve of of a gain gain of $400 $400,00 ,000. 0.  b. goodwi goo dwill ll of $400,0 $40 0,000. 00. c. a retai retained ned earnin earnings gs bal balanc ancee that that is is iincl nclusi usive ve of of a gain gain of $350 $350,00 ,000. 0. d. a g ain o f $4 00, 000 ANS: A

DIF:

M

OBJ: 2 - 6 | 2 -7

Scenario 2-1 Pinehollow acquired all of the outstanding stock of Stonebriar by issuing 100,000 shares of its $1

 par value valu e stock. st ock. The shares shar es have h ave a ffair air value valu e of $15 per shar share. e. Pinehollo Pine hollow w also al so paid p aid $25,000 $25, 000 in direct acquisition costs. Prior to the transaction, the companies have the following balance sheets: Assets Cash A c c o u nt s r e c e i v a bl e Inventory Pr o pe r ty , p la n t, a nd e q ui pme n t ( n e t) Total assets

P i n e h o ll o w $ 15 0, 00 0 500,000 900,000 1, 85 0, 00 0 $ 3 ,4 0 0 , 00 0

S t o n e b ri ar   $ 50 ,000 350,000 600,000 900 ,000 $ 1, 9 0 0 ,0 0 0

Liabilities and Stockholders' Equity Current liabilities B o n d s p ay ab l e Co mm on s t o c k ( $ 1 p a r )

$ 30 0, 00 0 1 , 0 00 , 0 00 300,000

$ 1 00 ,0 00 600,000 100,000

P a i d- i n c a p it a l i n e xc e s s o f p a r R e ta in e d e a r n i n g s T ot a l l ia b i li ti e s a n d e q ui ty

800,000 1, 00 0, 00 0 $ 3 ,4 0 0 , 00 0

900,000 200 ,000 $ 1, 9 0 0 ,0 0 0

The fair values of Stonebriar's inventory and plant, property and equipment are $700,000 and $1,000,000, respectively. 15. Refer Refer to to Scena Scenario rio 2-1. 2-1. The The journ journal al entr entry y to rec record ord the purcha purchase se of of Stone Stonebri briar ar would include a a. cr cred edit it to co comm mmon on stoc stock k for for $1,5 $1,500 00,0 ,000 00..  b. credit cred it tto o aadditi dditional onal paid-in paid -in capital capi tal for $1,100,0 $1,1 00,000. 00. c. deb ebit it to inv nves estm tmen entt for for $1 $1,5 ,50 00, 0,00 000 0. d. de debi bitt to inve invest stme ment nt for for $1,5 $1,525 25,0 ,000 00.. ANS: C 16.  ____.  __ __.

DIF:

M

OBJ: 2 - 6 | 2 -7

Refe Referr to to Scena Scenario rio 2-1. Goodwi Goodwill ll associa associated ted with with the the purchas purchasee of of Ston Stonebri ebriar ar is

 

a.  b. c. d.

$100,000 $125 $1 25,0 ,000 00 $300,000 $325,000

ANS: A

DIF:

M

OBJ: 2 - 6 | 2 -7

17. On Apri Aprill 1, 20X1, 20X1, Paap Paapee Compa Company ny paid paid $950,0 $950,000 00 for for all all the the issu issued ed aand nd out outsta stand nd-ing stock of Simon Corporation. The recorded assets and liabilities of the Simon Corporation on April 1, 20X1, follow: Cash Inventory Pr o p e r t y a nd e qu i pme n t ( n e t o f a c c umu l a t e d de p r e c i a t i on o f $ 3 20 ,0 0 0) Liabilities

$ 80 ,0 00 240,000 480,000 (1 8 0 ,0 0 0)

On April 1, 20X1, it was determined that the inventory of Simon had a fair value of $190,000, and the property and equipment (net) had a fair value of $560,000. What is the amount of goodwill resulting from the business combination? a. $0  b. $120 $1 20,0 ,000 00 c. $300,000 d. $230,000 ANS: C

DIF:

D

OBJ: 22 -7

18. Paro Compan Company y purc purchas hased ed 80% of the voting voting common common stock stock of of Sabon Sabon Company Company for $900,000. There are no liabilities liabilities.. The following book and fair values are available for Sabon: Bo o k V al u e $ 10 0 , 0 0 0 200,000 300,000 100,000

Current assets L a n d a n d b u il d i n g Ma c hi ne r y G o o d wi l l

F a i r Va l u e $200,000 200,000 600,000 ?

The machinery will appear on the consolidated balance sheet at ____. a. $600,000  b. $540 $5 40,0 ,000 00 c. $480,000 d. $300,000 ANS: A

DIF:

M

OBJ: 2 - 8

19. When When a compa company ny purc purchas hases es anot another her com compan pany y that that has has exis existin ting g goodw goodwill ill and the transaction is accounted for as a stock acquisition, the goodwill should be treated in the following manner. a. Goodwi Goodwill ll on the books books of an acquir acquired ed compan company y shou should ld be disreg disregard arded. ed.  b. Goodwill Goodwi ll is i s recorde re corded d prior pri or to t o record re cording ing fixed f ixed assets. asset s. c. Goodwi Goodwill ll is not record recorded ed until until all assets assets are sta stated ted at full full fair value. value. d. Good Goodwi will ll iiss trea treate ted d cons consis iste tent nt wit with h othe otherr tang tangib ible le ass asset ets. s. ANS: C

DIF:

M

OBJ: 22 -9

20. The The SEC requ requir ires es the the use of of pushpush-do down wn acco account untin ing g in some some speci specific fic sit situat uatio ions ns.. Push-down accounting results in: a. go goodw odwill ill be record recorded ed in the the pare parent nt compan company y sepa separat ratee acco account unts. s.

 

 b. c. d.

eliminating elimi nating subsidiary subsid iary retained reta ined earnings earni ngs and a nd paid-in pa id-in capital capit al in i n exc excess ess of o f pa par. r. re refle flect ctin ing g fair fair val value uess on the the subs subsid idia iary ry's 's sepa separat ratee acco accoun unts ts.. changing changing the consoli consolidati dation on workshee worksheett p proce rocedure dure because because no adjus adjustmen tmentt is nece necessar ssary y to to eliminate the investment in subsidiary account.

ANS: C

DIF:

M

OBJ: 2 - 1 0

PROBLEM

1. 31, 20X1:

Su Supe pern rnov ovaa Comp Compan any y had had the the fo foll llow owin ing g summ summar ariz ized ed bal balan ance ce she sheet et on on Dece Decemb mber er Assets

A c c o u nt s r e c e i v a bl e Inventory Pr op e r ty a nd pl a nt ( ne t) G o o d wi l l   T o t al

$ 2 00 ,0 00 450,000 600,000 150 ,000 $ 1, 4 0 0 ,0 0 0 Liabilities and Equity

 Notes payable payabl e Co mmo n s to c k , $5 p a r P a i d- i n c a p it a l i n e xc e s s o f p a r R e ta in e d e a r n i n g s   T o t al

$ 600 ,000 ,0 00 300,000 400,000 100 ,000 $ 1, 4 0 0 ,0 0 0

The fair value of the inventory and property and plant is $600,000 and $850,000, respectively. Assume that Redstar Corporation exchanges 75,000 of its $3 par value shares of common stock, when the fair price is $20/share, for 100% of the common stock of Supernova Company. Redstar incurred acquisition costs of $5,000 and stock issuance costs of $5,000. Required: a.

What What jou journa rnall entry entry will will R Reds edstar tar Corpo Corporat ratio ion n rec record ord for th thee inves investme tment nt in in Supe Superno rnova? va?

 b.

Prepare Prep are a supporti sup porting ng value va lue analysis anal ysis and determinat deter mination ion and a nd distri d istributio bution n of excess exce ss schedule

c.

Prepa Prepare re Redst Redstar' ar'ss eli elimi minat natio ion n and adju adjust stmen mentt entry entry for for the acqu acquis isiti ition on of of Supern Supernov ova. a.

ANS: a.

I nv nv es t men t in in Su Sup ern o v a (7 (75 , 00 00 0 ! $2  $ 2 0 )   Co mmo n Sto c k $3 p a r v a l ue   P a i d - i n- c a pi t a l e xc e s s of p a r A cq u i s i t i o n ex p e n s e*   Ca Cash

1 , 5 00 , 00 0 225,000 1, 2 7 5, 0 00 10,000

*alternative treatment: debit Paid-in capital in excess of par for issue costs  b) Value Analysis

1 0 , 00 0

 

Company ImComp a ny f a ir va l ue F a ir va lu e i de nt if i a bl e ne t a ss e ts G o o d wi l l

$ 1, 50 0 ,0 00  plied1 ,0 V ,Fair 0 5 0 ,0 ,Value 0 0alue 0 $ 450 ,00 0

Determination & Distribution Schedule Company Implied Fair Value F ai r v a l u e o f s u b s i d i ar y $ 1 ,5 0 0, 00 0 Less book value: C Stk $ 30 0,0 00 APIC 400,000 R/E 100,000 To ta l S /E $ 80 0,0 00 In t e re s t A c q u i re d Boo k va lu e E xc e s s o f f a ir ov e r bo ok $ 70 0,0 00 Adjustment of identifiable accounts: Adjustment Inventory $ 15 0,0 00 P ro p ert y a(increase n d eq u ip over Goodwill $150,000) T ot a l c.

(100%) Parent Price $ 1 ,5 00 ,0 00

N/A

0%  NCI Value

$ 80 0,00 0 1 0 0% $ 80 0,00 0 $ 70 0,00 0

2 50,000 300,000 $ 7 00 ,00 0

E l im in a t io n e n t r ie s EL

D

DIF:

 

 NCI Value Va lue (0%) (100%) $ 1 , 5 0 0Price , 00 0 Parent 1 , 05 05 0 , 00 00 0 $ 4 50, 000

M

Co mmo n Sto c k $ 5 P a r – Su b P ai d - i n c ap i t a l i n ex c es s o f p a r – s u b R et a i n e d E ar n i n g s – s u b   I n v e s t m e n t i n S u p e rn o v a

300,000 400,000 100,000

Inventory Pr ope r ty a nd Pla nt

150,000 250,000

G o o d w i ll   I n v e s t m e n t i n S u p e rn o v a

300,000

800,000

700,000

OBJ: 2 -2 | 2-3 | 2 -4 | 2 -5 | 2-6

2. On Dece Decemb mber er 31, 31, 20X 20X1, 1, Pr Prio iori rity ty Comp Compan any y pur purch chas ased ed 80 80% % of of the the comm common on stoc stock k of Subsidiary Company for $1,550,000. On this date, Subsidiary had total owners' equity of $650,000 (common stock $100,000; other paid-in capital, $200,000; and retained e arnings, $350,000). Any excess of cost over book value is due to the under or overvaluation of certain assets and liabilities. Assets and liabilities with differences in book and fair values are provided in the following table: B oo k Va l u e Current Assets A c c o un t s R e c e i va b l e Inventory

$500,000 200,000 800,000

Fair   Va l u e $800,000 150,000 800,000

 

Land B u i l d i n gs ( n e t ) C ur r e nt L ia bil iti e s L on g - T e r m D e bt

100,000 700,000 800,000 850,000

600,000 900,000 875,000 930,000

Remaining excess, if any, is due to goodwill. Required: a.

Using Using the infor informat matio ion n abov abovee and and on the the separ separate ate works workshee heet, t, prep prepare are a sched schedule ule to determine and distribute the excess of cost over book value.

 b.

Complete Comp lete the Figure Figur e 2-1 2- 1 workshee wor ksheett for fo r a consolida conso lidated ted balanc b alancee sheet she et as a s of December Dece mber 31, 20X1.

A c c ou nt T it le s Assets: Current Assets A c c o un t s R e c e i va b l e Inventory I n v e s t m en t i n Su b C o .

Figure 2-1 Tr ia l B a la nc e P ri o ri t y Su b. C o mp an y C om p a n y

425,000 530,000 1 , 60 0 ,0 0 0 1 , 55 0 ,0 0 0

5 00 , 00 0 2 00 , 00 0 8 00 , 00 0

Land Bui ldin gs an an d Eq Eq uip ment Accumulated Deprecia-

225,000 1 ,2 ,2 0 0, 0, 00 00 0

1 00 , 00 0 1 ,1 ,1 00 00 , 00 00 0

 

4 , 73 0 ,0 0 0

2 ,3 0 0, 0 00

2 , 10 0 ,0 0 0 1 , 00 0 ,0 0 0

8 00 , 00 0 8 50 , 00 0

T o t al

Liabilities and Equity: C ur r e nt L ia bil iti e s Bo n d s P ay ab l e

Common St oc k – P Co. Addn’l paid-in capt – P Co Re t ai n ed E arn i n g s – P Co .

900,000 670,000 60,000

Common St oc k – S Co. Addn’l paid-in capt – S Co Re t ai n ed E arn i n g s – S Co .  NCI   T o t al

E l i m in a t i o n s a n d A dj us tm e nt s D e bit Credit

1 00 , 00 0 2 00 , 00 0 3 50 , 00 0

4 , 73 0 ,0 0 0

2 ,3 0 0, 0 00 (continued)

Consolidated

 

A c c ou nt T it le s Assets: Current Assets Accounts Receivable Inventory Investment in Sub Co.

NCI

Balance Sheet De b i t Credit

Land Buildings and Equipment Accumulated Depreciation  

Total

Liabilities and Equity: Current Liabilities Bonds Payable

Common Stock – P Co. Addn’l paid-in capt – P Co Retained Earnings – P Co. Common Stock – S Co. Addn’l paid-in capt – S Co Retained Earnings – S Co.  NCI   Total ANS: a.

Dete Determ rmin inat atio ion n aand nd Dist Distri ribu buti tion on Sc Sche hedu dule le:: Company Implied

Fair value of subsidiary Less book value: C St k  APIC R/ E T ot a l S / E Interest Acquired B o o k va l ue E xcess o f f ai r over bo ok

F a i r Va l u e $ 1,937,500 $

$

1 00 , 00 0 200,00 200 ,000 0 3 50 , 00 0 6 50 , 00 0

$ 1 , 2 87 , 5 00

Adjust identifiable accounts:

Current assets  Accounts  Accou nts Receiva Re ceivable ble Lan d Bu i l d i n g s (n e t ) Current liabilities L on g - t e r m d e bt

$

3 00 , 00 0 (50, (50,000) 000) 500, 00 0 200, 00 0 ( 7 5, 00 0) ( 8 0, 00 0)

Pa r e n t Pr i c e $ 1,550,000

$

6 50 , 00 0 8 0% $ 5 20 , 00 0 $ 1, 03 0 , 0 00

N CI V a l u e $387,500

$650,000 2 0% $130,000 $257,500

 

Goodwill Tot al

 b.

492, 50 0 $ 1, 2 87 , 50 0

For the workshe w orksheet et solution so lution,, pl please ease refer refe r to Answer Answe r 2-1. 2- 1. Answer 2-1 Trial Balance

Eliminations and Adjustments P r io r it y A c c ou nt T it le s Assets: Current Assets A c c o un t s R e c e i va b l e Inventory I n v e s t m en t i n Su b . Co .

Su b .

Co m pa n y

Co mp a n y

4 25 , 00 0 5 30 , 00 0 1, 60 0 ,0 00 1, 55 0 ,0 00

50 0 ,0 0 0 20 0 ,0 0 0 80 0 ,0 0 0

Land B u i l d i n g s a n d E q u i p me n t Accu Ac cumu mula late ted d Depr Deprec ecia iati tion on G o o d wi l l   T o t al

2 25 , 00 0 1, 2 20 0 0 ,0 00 (800 (800,00 ,000) 0)

10 0 ,0 0 0 1 , 1 0 0 , 00 00 0 (400 (400,0 ,000 00))

4, 73 0 ,0 00

2 ,3 0 0, 00 0

Liabilities Current Liaand bilitEquity: i es Bo n d s P ay ab l e P r em i u m o n Bo n d s P ay

2, 10 0 ,0 00 1, 00 0 ,0 00

80 0 ,0 0 0 85 0 ,0 0 0

Common St oc k – P Co. Addn’l paid-in capt – P Co R e t . Ea r n i ng s – P C o .

9 00 , 00 0

A c c ou nt T it le s Assets: Current Assets A c c o un t s R e c e i va b l e Inventory I n v e s t m en t i n Su b . Co . Land B u i l d i n g s a n d E q u i p me n t A c cu m u l at e d D e p re ci a t i o n

( D)

Credit

300,000

( D) ( D)

500,000 2 0 0 , 00 00 0

( D)

492,500

(D )

50,000

( E L) (D )

520,000 1 , 0 30 , 0 00

(D )

75,000

(D )

80,000

6 70 , 00 0 6 0, 0 00

Common St oc k – S Co. Addn’l paid-in capt – S Co R e t . Ea r n i ng s – S C o .  NCI   T o t al

Debit

4, 73 0 ,0 00

10 0 ,0 0 0

(EL)

80,000

20 0 ,0 0 0 35 0 ,0 0 0

(EL) (EL)

160,000 280,000

2 ,3 0 0, 00 0

NCI

(D )

2,012,500

Consolidated Balance Sheet De b i t Credit 1,225,000 680,000 2,400,000 -825,000 2,500,000 1 , 20 0 , 00 0

257,500

2 , 0 12 , 5 00 (continued)

 

G o o d wi l l

492,500

Liabilities and Equity: C ur r e nt L ia bil iti e s Bo n d s P ay ab l e P r em i u m o n Bo n d s P ay

2 , 97 5 , 00 0 1 , 85 0 , 00 0 80,000

Common St oc k – P Co. A d d n ’ l p ai d - i n c a p t – P Co R e t . Ea r n i ng s – P C o .

9 00 , 0 0 0 6 70 , 0 0 0 60,000

Common St oc k – S Co. A d d n ’ l p ai d - i n c a p t – S Co R e t . Ea r n i ng s – S C o .

20,000 40,000 2 3 7, 5 0 0

 NCI   To T o t al

387, 38 7,50 500 0 8,122,500

387 ,500 ,5 00 8 , 12 2 , 50 0

Eliminations and Adjustments: (EL)) (EL

Elimi Elimina nate te 80% 80% of the the subsi subsidi diary ary's 's eq equi uity ty acco accoun unts ts agai agains nstt the the inves investm tment ent in in subsidiary account.

(D)

DIF:

M

Allo Allocat catee the the ex exces cesss of of cos costt o over ver bo book ok va valu luee to to net net asset assetss as as req requi uired red by th thee determination and distribution of excess schedule. OBJ: 2 -4 | 2-5 | 2 -6 | 2 -7 | 2-8

3. On Dece Decemb mber er 31, 31, 20X 20X1, 1, Par Paren entt Com Compa pany ny pu purc rcha hase sed d 80% 80% of th thee comm common on stoc stock k of of Subsidiary Company for $280,000. On this date, Subsidiary had total owners' equity of $250,000 (common stock $20,000; other paid-in capital, $80,000; and retained earnings, $150,000). Any excess of cost over book value is due to the under or overvaluation of certain assets and liabilities. Inventory is undervalued $5,000. Land is undervalued $20,000. Buildings and equipment have a fair value which exceeds book value by $30,000. Bonds payable are overvalued $5,000. The remaining excess, if any, is due to goodwill. Required: a.

Prepa Prepare re a val value ue analy analysi siss ssche chedu dule le for for thi thiss bus busin iness ess com combi bina nati tion on..

 b.

Prepare Prep are the determinat deter mination ion and a nd distrib di stribution ution schedule sche dule for this business busine ss combina co mbination tion

c.

Prepa Prepare re the the nece necess ssary ary eli elimi minat natio ion n ent entri ries es in ge gener neral al jo jour urnal nal fo form. rm.

ANS: a) Value analysis schedule

Company fair value Fair Fair valu value e iden identi tifi fiab able le net net asse assets ts Goodwill

Company Implied F a i r Va l u e $ 350 , 000 310, 310,00 000 0 $ 40, 000

Pa r e n t Pr i c e $ 2 80 , 000 248, 248,000 000 $ 32 ,00 0

NCI V a l u e $ 7 0, 0 00 62,0 62,000 00 $ 8, 00 0

 

 b) Determ De terminati ination on an and d distribu dis tribution tion sched schedule: ule: Company Implied F a i r Va l u e Fair value of subsidiary $ 3 50, 0 00 Less book value: C St k $ 2 0, 000  APIC 80,000 80, 000 R/ E 15 0, 000 T ot a l S / E $ 2 50, 0 00 I nt e r es t A cq ui r e d B o o k va l ue E xcess o f f ai r over bo ok $ 1 00, 0 00  Adjus t identifia  Adjust ide ntifiable ble a accou ccounts: nts: I n ve nt o r y L and Bldgs & Equip B o n d P a y D i sc o un t Goodwill T o ta l

$

$

Pa r e n t Pr i c e $ 28 0, 00 0

$ $ $

NC I V a l u e $ 7 0, 0 00

25 0, 00 0 80% 20 0, 00 0 8 0, 0, 000

$ 25 0 , 0 0 0 20% $ 5 0, 0 00 $ 2 0, 0 00

5,000 2 0,000 3 0,000 5, 000 4 0,000 1 00, 0 00

c) Elimination entries: ELIMINATION ENTRY 'EL'

C Stk-Subb  APIC-Su  APIC-Sub R / E - Su b I nv es t m e n t i n S ub

1 6, 0 00 64,000 64, 000 120, 00 0 2 00, 000 200,000

200,000

ELIMINATION ENTRY 'D'

I n ven t or y Lan d B l d g s & E q ui p B o nd P a y D i s c ou n t Goodwill I nv es t m e n t i n S ub R/E-Sub (NCI)

$

5, 000 20, 000 30, 000 5,000 40, 000 80, 000 20, 000 100,000

DIF:

M

100,000

OBJ: 2 -4 | 2-5 | 2 -6 | 2 -7 | 2-8

4. On Ja Janu nuar ary y 1, 1, 20X 20X1, 1, Par Paren entt Com Compa pany ny pu purc rcha hase sed d 100 100% % of of the the comm common on stoc stock k of of Subsidiary Company for $280,000. On this date, Subsidiary had total owners' equity of $240,000. On January 1, 20X1, the excess of cost over book value is due to a $15,000 undervaluation of inventory, to a $5,000 overvaluation of Bonds P ayable, and to an undervaluation of land,  building  buil ding and equipme equi pment. nt. The fair valu valuee o off lland and is $50,000. $50, 000. The fair fai r v value alue of building buil ding and equipment is $200,000. The book value of the land is $30,000. The book value of the building and equipment is $180,000. Required: a.

Usin Us ing g the the in info forma rmatio tion n abov abovee and and on the the sepa separat ratee works workshee heet, t, compl complete ete a va value lue analy analysi siss schedule

 

 b.

Complete Comp lete schedule sche dule for determin dete rmination ation and distributi distr ibution on of o f the th e eexcess xcess of cost c ost over book value.

c.

Comple Complete te the the F Figu igure re 2 2-5 -5 work worksh sheet eet for a con conso soli lidat dated ed bala balance nce shee sheett as of of Janua January ry 1, 1, 20X1. Figure 2-5 Trial Balance Tr ia l B a la nc e

A c c ou nt T it le s Assets: Inventory Other Current Assets Investment in Sub-

Land B u il di ng s Accumulated DepreciaO t h e r I n t a n g i bl e s T o t al Liabilities and Equity: C ur r e nt L ia bil iti e s Bo n d s P ay ab l e

Common St oc k – P Co. Addn’l Pd-In Capt – P sCio d.iary Retained Earnings – P Co .

Par en t Co m pa n y

Su b . Co mp an y

50,000 239,000

3 0, 0 00 1 65 , 00 0

120,000 350,000

3 0, 0 00 2 30 , 00 0

40,000 979,000

4 05 , 00 0

191,000

6 5, 0 00 1 00 , 00 0

100,000 2 18 50 0 ,, 0 00 00 0 538,000

Common St oc k – S Co. Addn’l Pd-In Capt – S Co . Retained Earnings – S Co . tio n  NCI   T o t al

E l i m i n at i o n s an d A dj us tm e n ts D e bit Credit

5 0, 0 00 7 0, 0 00 1 20 , 00 0 ( 1(50,000) 0 0 ,0 0 0) 979,000

4 05 , 00 0 (continued)

A c c ou nt T it le s Assets: Inventory Other Current Assets

NCI

Consolidated Consolidated Balance Sheet Debit Credit

 

Investment in Subsidiary Land Buildings Accumulated Depreciation Other Intangibles  

Total

Liabilities and Equity: Current Liabilities Bonds Payable

Common Stock – P Co. Addn’l Pd-In Capt – P Co. Retained Earnings – P Co. Common Stock – S Co. Addn’l Pd-In Capt – S Co. Retained Earnings – S Co.  NCI   Total ANS: a. Value analysis schedule: Company Implied Company fair value Fair air value iden dentifiable ble net net assets ets G a i n o n a c q u is i t i o n

$ $

2 80, 00 0 300, 300,00 000 0 ( 2 0 , 0 00 )

Parent Price $ 2 80, 0 00 300, 300,00 000 0 $ ( 2 0 , 00 0 )

 

Tot al

c.

$

40, 00 0

Fo Forr tthe he work worksh shee eett sol solut utio ion, n, plea please se re refe ferr to to Ans Answe werr 2 2-5 -5..

A c c ou nt T it le s Assets: Inventory Other Current Assets Investment in Sub-

Land B u il di ng s Accumulated DepreciaO t h e r I n t a n g i bl e s Goodwill   T o t al Liabilities and Equity: C ur r e nt L ia bil iti e s Bo n d s P ay ab l e Discount on Bonds P a ya bl e s id i a r y Common St oc k – P Co. Addn’l Pd-In Capt – P Co . Retained Earnings – P Co .

Answer 2-5 Trial Balance Tr ia l B a la nc e Par en t Su b . Co m pa n y Co mp an y

50,000 239,000 240,000 (EL) 120,000 350,000

 NCI   T o t al

A c c ou nt T it le s Assets: Inventory Other Current Assets I n v es t m e n t i n S u b s i d i a r y

( D)

1 5, 0 0 0

(D ) 3 0, 0 00 2 30 , 00 0

( D) ( D)

2 0, 0 0 0 2 0, 0 0 0

( D)

5,000

40,000

40,000 979,000

4 05 , 00 0

191,000

6 5, 0 00 1 00 , 00 0

280,000 100,000 150,000 538,000

Common St oc k – S Co. Addn’l Pd-In Capt – S Co . tio n Retained Earnings – S Co .

3 0, 0 00 1 65 , 00 0

E l i m i n at i o n s an d A dj us tm e n ts D e bit Credit

( D) 5 0, 0 00

(EL)

5 0, 0 0 0

7 0, 0 00

(EL)

7 0, 0 0 0

1 20 , 00 0

(EL)

120,000

20,000

( 1(50,000) 0 0 ,0 0 0)

979,000

NCI

4 05 , 00 0

300,000

Consolidated Consolidated Balance Sheet Debit Credit 95,000 4 0 4, 0 0 0 --

300,000 (continued)

 

Land B u il di ng s A c cu m u l at e d D e p re ci a t i o n O t h e r I n t a n g i bl e s Goodwill   Total

1 7 0, 0 0 0 6 0 0, 0 0 0 150,000 40,000

Liabilities and Equity: C ur r e nt L ia bil iti e s Bo n d s P ay ab l e D i s c o u n t o n Bo n d s P ay a b l e

256,000 100,000 5,000

Common St oc k – P Co. A d d n ’ l P d -I n C a p t – P C o . Re t ai n ed E arn i n g s – P Co .

100,000 150,000 558,000

Common St oc k – S Co. A d d n ’ l P d -I n C a p t – S C o . Re t ai n ed E arn i n g s – S Co .

0 0 0

 NCI

0

 

Total To

0 1 , 31 4 , 00 0

1,314,000

Eliminations and Adjustments:

DIF:

(EL)) (EL

Elimi Elimina nate te 100% 100% of of the sub subsi sidi diary ary's 's eq equi uity ty acco accoun unts ts again against st the the in inve vest stmen mentt in subsidiary account.

(D)

Allo Allocat catee the the ex exces cesss of of cos costt o over ver bo book ok va valu luee to to net net asset assetss as as req requi uired red by th thee determination and distribution of excess schedule; gain on acquisition closed to parent’s Retained Earnings account

M 5.

OBJ: 2 -4 | 2 -5 | 2- 6 | 2- 7 On Ja Janu nuar ary y 1, 1, 20X1 20X1,, Par Paren entt Com Compa pany ny pu purc rcha hase sed d 90% 90% of th thee com commo mon n sto stock ck of

Subsidiary Company for $252,000. On this date, Subsidiary had total owners' equity of $240,000 consisting of $50,000 in common stock, $70,000 additional paid-in capital, and $120,000 in retained earnings. On January 1, 20X1, the excess of cost over book value is due to a $15,000 undervaluation of inventory, to a $5,000 overvaluation of Bonds P ayable, and to an undervaluation of land,  building  buil ding and equipme equi pment. nt. The fair valu valuee o off lland and is $50,000. $50, 000. The fair fai r v value alue of building buil ding and equipment is $200,000. The book value of the land is $30,000. The book value of the building and equipment is $180,000. Required: a.

Compl Complet etee the the va valu luat atio ion n analy analysi siss sc sched hedul ulee for for th this is combi combinat natio ion. n.

 b.

Complete Compl ete the determinat deter mination ion and d distri istribution bution schedule sche dule for this comb combinati ination. on.

c.

Prepar Prepare, e, iin n gener general al jjou ourna rnall fo form, rm, the the elim elimina inati tion on eent ntrie riess requi required red to to prepa prepare re a cons consol oliidated balance sheet for Parent and Subsidiary on January 1, 20X1.

 

ANS: a.

Va l u e a n a l y s i s s c h e d u l e

Company fair value Fair value identifiable net as-

Company Implied F a i r Va l u e $ 2 82, 000**   30,000 270,000 300,000

Pa r e n t Pr i c e $ 2 52 ,0 00

sets on acquisition  $ (1 (18,000) $ ( 1 8 , 0 0 0) Gain *Cannot be less than the NCI share of the fair value of net assets **Sum of parent price + minimum allowable for NCI value

 b.

T ot a l S / E Interest Acquired B o o k va l ue E xcess o f f ai r over bo ok  Adjus t identifia  Adjust ide ntifiable ble a accou ccounts: nts: I n ven t or y Lan d B l d g s & E q ui p B o nd P a y D i s c ou n t G a i n o n a c q u is i t i o n Tot al

Company Implied F a i r Va l u e  $ 282,000

–

Pa re n t Pr i c e $ 252,000

NC I V a l u e $ 30,000

$ 2 40, 0 00   90 90% $ 2 16, 0 00 $ 3 36 6, 00 0

$ 24 0 , 0 00 10% $ 2 4, 0 0 0 $ 6, 000

$ 50, 0 00 70,000 70, 000 12 0, 0 00 $ 2 40 , 00 0 $ 42, 0 00

$ 15, 0 00 20, 00 0 20, 00 0 5, 000 ( 1 8, 0 0 0) $ 42, 0 00

E li m i na ti o n e n tr i e s

ELIMINATION ENTRY 'EL'

C St k - Su b  APIC-Sub  APIC-Su b R / E - Su b I nv es t m e n t i n S ub

45, 00 0 63, 63,000 000 1 08, 0 00 216 ,0 00 216,000

216,000

ELIMINATION ENTRY 'D'

I n ven t or y Lan d B l d g s & E q ui p B o nd P a y D i s c ou n t G a i n o n a cqu i si t i on I nv es t m e n t i n S ub R/E-Sub (NCI)

$ 15, 0 00 20, 00 0 20, 00 0 5, 000 18, 000 36, 000 6,000 60,000

DIF:

$

Determinat Deter mination ion and a nd distrib di stribution ution schedule sched ule

Fair value of subsidiary Less book value: C St k  APIC R/ E

c.

NC I V a l u e $ 30 , 000 *

D

OBJ: 2 -4 | 2-5 | 2 -6 | 2 -7 | 2-8

60,000

 

6. I n d i vi d u a l B a la n c e S h e e ts P ep p er C o . Sal t I n c. $ 26 ,0 00 $ 20 ,0 0 0 20,000 30,000 12 5 , 0 0 0 110,000 30,000 80,000 32 0 , 0 0 0 160,000 27 9 , 0 0 0 $800,000 $400,000

Cash A c c o u nt s R e c e i v a b l e , ne t Inventory Land Bu il di ng a nd Eq ui pme n t I n v es t m e n t i n S u b s i d i a r y G o o d wi l l Total Assets A c c ou n t s P a y a bl e Other Liabilities Co mmon St oc k R e t a i n e d E a r n i ng s  Noncontrol  Nonco ntrolling ling Inte Interest rest T o ta l L i a b il i t i e s & S t o c k h ol d e r s' Eq u i t y

$ 40 ,0 00 70,000 40 0 , 0 0 0 29 0 , 0 0 0 $800,000

$ 40 ,0 0 0 60,000 200,000 100,000 $400,000

Consolidated Financial Statements $ 4 6,0 0 0 5 0 , 00 0 270,000 124,000 459,000 41,0 00 $990,000 $ 8 0,0 0 0 130,000 400,000 290,000 90,000 90, 000 $990,000

Answer the following based upon the above financial statements: a.  b. c.

ANS: a.  b.

c.

How How muc much h did did Pe Pepp pper er Co. Co. p pay ay to ac acqu quir iree Sal Saltt IInc nc.? .? What was w as the th e fair fai r value val ue of Salt's Inventory Invent ory at a t the time of acquisiti ac quisition? on? Was the the book book valu valuee of Salt's Salt's Bui Buildi lding ng and and Equi Equipme pment nt over overval valued ued or und underv ervalu alued ed relative to the Building and Equipment's fair value at the time of acquisition?

I n v e s t me n t i n S u b s i d i a r y

$279,000

Consolida Cons olidated ted Inventor Inve ntory y Pe p p e r Co . I nv e nt o r y V a lu e a t t r ib u ta b le to S a lt

$270 $2 70,0 ,000 00 1 25 , 00 0 $145,000

The The Build Buildin ing g and and Equip Equipmen ment's t's bo book ok valu valuee was was overv overvalu alued ed rela relativ tivee to the fair fair valu value. e. $320,000 + $160,000 = $480,000; consolidated buildings carried at $459,000 Salt’s B&E overvalued by $21,000

DIF:

D

7. 31, 20X1:

OBJ: 2 -4 | 2 -5 | 2- 6 Su Supe pern rnov ovaa Comp Compan any y had had the the fo foll llow owin ing g summ summar ariz ized ed bal balan ance ce she sheet et on on Dece Decemb mber er

Assets A c c o u nt s r e c e i v a bl e Inventory Pr op e r ty a nd pl a nt ( ne t) G o o d wi l l   T o t al

$ 2 00 ,0 00 450,000 600,000 150 ,000 $ 1, 4 0 0 ,0 0 0 Liabilities and Equity

 Notes payable payabl e

$ 600 ,000 ,0 00

 

Co mmo n s to c k , $5 p a r P a i d- i n c a p it a l i n e xc e s s o f p a r R e ta in e d e a r n i n g s   T o t al

300,000 400,000 100 ,000 $ 1, 4 0 0 ,0 0 0

The fair value of the inventory and property and plant is $600,000 and $850,000, respectively. Required: a.

Assum Assumee th that at Reds Redstar tar Corpo Corporat ration ion pu purch rchase asess 100% 100% of of the the commo common n stock stock of Supe Superno rnova va Company for $1,800,000. What value will be assigned to the following accounts of the Supernova Company when preparing a consolidated balance sheet on December 31, 20X1? (1) (2) (3) (4)

In ven tor y Pr op e r ty a nd pl a nt G o od w i l l N o n co n t ro l l i n g i n t e re s t

___ ____ __   _______ __   ___ ____ __   _______ __  

 b.

Prepare Prep are a valuati va luation on sc schedul hedulee

c.

Prepar Preparee a ssupp upport ortin ing g deter determi minat nation ion and dist distrib ributi ution on of exce excess ss schedu schedule. le.

ANS: a.

(1) (2) (3) (4)

In ven tor y Pr op e r ty a nd pl a nt G o od w i l l N o n co n t ro l l i n g i n t e re s t

$600,000 $850,000 $750,000 0

( $ 4 5 0 , 0 0 0 BV + $ 1 5 0 , 0 0 0 ) ( $ 6 0 0 , 0 0 0 BV + $ 2 5 0 , 0 0 0 ) N o N CI

 b. Valuat V aluation ion schedu s chedule le

Comp a ny f a ir va l ue F a ir va lu e i de nt if i a bl e ne t a ss e ts G o o d wi l l c.

F ai r v a l u e o f s u b s i d i ar y Less book value: C Stk APIC R/E To ta l S /E In t e re s t A c q u i re d Boo k va lu e E xc e s s o f f a ir ov e r bo ok Adjust identifiable accounts: Inventory P r o p e rt y & p l a n t ( n e t )

Company Implied F a i r Va l u e $ 1,8 00 ,00 0 1,050,0 00 $ 750,0 00

Company Implied Fair Value $ 1,8 00 ,00 0 $

$

300 ,000 400,000 100,000 800 ,000

$ 1,0 00 ,00 0

$

150 ,000 250,000

Parent Price $ 1,8 00 ,0 00 1,05 0,00 0 $ 75 0,00 0

Par en t Pr i ce $ 1 ,8 00 ,00 0

$

800 ,000 10 0 % 8 0 0, 0 00 $ 1 ,0 00 ,00 0

 

Goodwill (increase from $150,000) T ot a l DIF:

M

600,000 $ 1,0 00 ,00 0

OBJ: 2 -6 | 2 -7 | 2- 9

8. Fo Fort rtun unaa Comp Compan any y is issu sued ed 70, 70,00 000 0 shar shares es of of $1 pa parr stoc stock, k, wit with h a fair fair val value ue of of $20 $20  per share, shar e, for 80% of the t he outst o utstandin anding g shares sh ares of Acapp A cappella ella Company. Comp any. The firms firm s had ha d the th e ffollow ollowing ing separate balance sheets  prior to the acquisition: Assets Current assets Pr o pe r ty , p la n t, a nd e q ui pme n t ( n e t) G o o d wi l l Total assets

Fo r tu na $ 2, 1 0 0 ,0 0 0 4,600,000 $ 6, 7 0 0 ,0 0 0

Ac a p p e l l a $ 9 60 ,0 00 1,300,000 240 ,000 $ 2, 5 0 0 ,0 0 0

Liabilities and Stockholders' Equity Liabilities Co mm on s t o c k ( $ 1 p a r ) Co mm on s t o c k ( $ 5 p a r ) P a i d- i n c a p it a l i n e xc e s s o f p a r R e ta in e d e a r n i n g s T ot a l l ia b i li ti e s a n d e q ui ty

$ 3, 0 0 0 ,0 0 0 800,000 2,200,000 70 0,000 $ 6, 7 0 0 ,0 0 0

$ 8 00 ,0 00 200,000 300,000 1 ,2 00 ,0 00 $ 2, 5 0 0 ,0 0 0

Book values equal fair values for the assets and liabilities of Acappella Company, except for the  propert  prop erty, y, plant, plan t, and equipme equ ipment, nt, which whic h has h as a ffair air value valu e o off $ $1,6 1,600,0 00,000. 00. Required: a.

Pre rep pare a value an analysis sc schedule

 b.

Prepare Prep are a determ de terminati ination on and an d distribu dis tribution tion of eexces xcesss schedule sch edule..

c.

Provid Providee all eelim limina inati tions ons on on the the par parti tial al balan balance ce sheet sheet work worksh sheet eet prov provid ided ed in Fig Figure ure 2-8 2-8 and complete the noncontrolling interest column. Figure 2-8

Co.for and Subsidiary Acappella Co. Partial Fortuna Worksheet Consolidated Financial Statements January 2, 20X4

A c c ou nt T it le s Current Assets Property, Plant, and   E q ui p me n t I n v e s t me n t i n A ca p p e l l a

Balance Sheet For tu na A c a p p e ll a 2 ,1 00 ,0 0 0 9 6 0, 0 00

4 ,6 00 ,0 0 0 1 ,4 00 ,0 0 0

G o o d wi l l Liabilities Co mmon St oc k – Fo r tu na Paid-in Capital in Excess

1, 30 0 ,0 0 0

2 4 0, 0 00 (3 ,0 0 0, 00 0 ) ( 87 0 ,0 0 0)

(8 0 0 ,0 0 0)

 

  of Pa r – For t un a R et E a rn i n g s – F o r t u n a C o m m o n S t o ck – A c a p p e l l a Paid-in Capital in Excess   o f P a r – A c ap p el l a Re t E ar n – A cap p el l a

(3 ,5 3 0, 00 0 ) ( 70 0 ,0 0 0) (2 0 0 ,0 0 0) (3 0 0 ,0 0 0) (1 ,2 00 ,0 0 0)

(continued)

Fortuna Co. and Subsidiary Acappella Co. Partial Worksheet for Consolidated Financial Statements January 2, 20X4

A c c ou nt T it le s Current Assets

Eliminations and Adjustments D e bit Credit

NCI

Property, Plant, and   Equipment Investment in Acappella Goodwill Liabilities Common Stock – Fortuna Paid-in Capital in Excess   of Par – Fortuna Ret Earnings – Fortuna Common Stock – Acappella Paid-in Capital in Excess   of Par – Acappella Ret Earn – Acappella

ANS: a. Value analysis schedule:

Comp a ny f a ir va l ue F a ir va lu e i de nt if i a bl e ne t a ss e ts G ai n

Company Implied F a i r Va l u e $ 1 ,75 2, 000 1, 1,76 760, 0,00 000 0 $ (8, 000)

P a r e nt P r i c e $1 , 40 0 ,0 0 0 1, 1,40 408, 8,00 000 0 (8, 000)

NCI Value $ 35 2, 000 * 35 352, 2,00 000 0 $ -

*Cannot be less than NCI share of identifiable net assets; company fair value is sum of parent  price and NCI value. value .

 b. Determi De terminatio nation n and distributio distri bution n of excess exces s schedule sch edule::

 

F a i r va l ue s u b s i di a r y Less book value: Comm Stoc k APIC Ret E arn To ta l S /E I n t ere s t ac q u i re d Boo k va lu e E xc e s s o f f a ir ov e r bo ok Adjust identifiable accounts: P l a n t an d e q u i p m e n t G o o d wi l l G a i n o n a cq u i s i t i o n T ot a l c.

Company Implied Fair V a lu e $1,752,000

Parent Price $1,400,000

NCI Value $352,000

1,700,000 8 0% 1,360,000 4 0, 0 0 0

1 , 70 0 ,0 0 0 20% 340,000 12,000

200,000 300,000 1 , 20 0 ,0 0 0 1 , 70 0 ,0 0 0

52,000

3 0 0, 0 00 (2 4 0, 0 00 ) (8,000 ) 5 2 ,0 00

DR   CR   CR  

Fo Forr tthe he work worksh shee eett sol solut utio ion, n, plea please se re refe ferr to to Ans Answe werr 2 2-8 -8.. Figure 2-8 Fortuna Co. and Subsidiary Acappella Co.

Partial Worksheet for Consolidated Financial Statements January 2, 20X4

Balance Sheet For tu na Ac a p p e l l a 2 ,1 00 ,0 0 0 9 6 0, 0 00

A c c ou nt T it le s Current Assets Property, Plant, and   E q ui p me n t I n v e s t me n t i n A ca p p e l l a G o o d wi l l Liabilities Co mmon St oc k – Fo r tu na Paid-in Capital in Excess   of Pa r – For t un a R et E a rn i n g s – F o r t u n a C o m m o n S t o ck – A c a p p e l l a Paid-in Capital in Excess   o f P a r – A c ap p el l a Re t E ar n – A cap p el l a

4 ,6 00 ,0 0 0 1 ,4 00 ,0 0 0

(3 ,0 00 , 00 0) (8 7 0 ,0 0 0)

1 ,3 00 ,0 0 0

2 4 0, 0 00 (8 0 0 ,0 0 0)

(3 ,5 30 , 00 0) (7 0 0 ,0 0 0) (2 0 0 ,0 0 0) (3 0 0 ,0 0 0) (1 ,2 00 ,0 0 0)

(continued)

Fortuna Co. and Subsidiary Acappella Co. Partial Worksheet for Consolidated Financial Statements January 2, 20X4

 

Eliminations and Adjustments De b i t Credit

A c c ou nt T it le s Current Assets Property, Plant, and   Eq E q ui p me n t

( D)

3 0 0 , 0 00

I n v e s t me n t i n A ca p p e l l a G o o d wi l l Liabilities Common Stock – Fortuna Paid-in Capital in Excess   of Par – Fortuna R et . E a r n i n g s – Fo r t u n a C o m m o n S t o ck – A c a p p e l l a Paid-in Capital in Excess   o f P a r – A c ap p el l a Re t . E arn i n g s – A cap p el l a

NCI

((D EL )) (D)

(D)

1,34 60 0 ,, 0 00 00 0 240,000

8,000

(EL)

1 6 0 , 0 00

( 40 ,0 0 0)

(EL) (EL)

2 4 0 , 0 00 9 6 0 , 0 00

( 60 ,0 0 0) (2 5 2 ,0 0 0)

(D)

1 2, 0 0 0

352,000

Eliminations and Adjustments: (EL) (EL) (D)

DIF:

M

Elimi Elimina nate te 80% 80% of sub subsi sidi diary ary equit equity y again against st the the inv inves estme tment nt accou account nt.. Dist Distrib ribut utee exce excess ss accord accordin ing g tto o tthe he determ determin inati ation on and di dist strib ribut utio ion n of of exces excesss schedule. OBJ: 2 -4 | 2-6 | 2 -7 | 2 -8 | 2-9

ESSAY

1.

Discu Discuss ss the the con condi diti tion onss und under er whic which h the the FASB FASB w wou ould ld assume assume a pres presum umpt ptio ion n of of

control. Additionally, what circumstances might the FASB require consolidation even though the parent doesunder not control the subsidiary? ANS: The FASB presumes that control exists if one company owns over 50% of the voting interest in another company or has an unconditional right to appoint a majority of the members of another company's controlling body. Additionally, Additionally, in the absence of evidence to the contrary, one or more of the following conditions conditions would lead to a presumption of control: 1. 2. 3. 4.

Owner Ownersh ship ip of of a la large rge no nonco ncont ntrol rolli ling ng iint ntere erest st wher wheree no othe otherr party party has has a sign signifi ifican cantt interest. Owner Ownershi ship p of secu securit rities ies or uncon uncondit dition ional al rrigh ights ts iin n the the compa company ny that that can be be conver converted ted into securities that would cause a controlling interest to exist. The acquirin acquiring g ccompa ompany ny has the uncondi uncondition tional al right right to to diss dissolve olve the entity entity whose whose int interes erestt was acquired and assume control of the assets. A relat relation ionshi ship pw with ith another another enti entity ty that assures assures control control thr through ough provisi provisions ons in a charte charter, r,  bylaws,  bylaw s, or trust agreement agre ement..

 

5. 6.

DIF:

A legal legal obliga obligatio tion n cr creat eated ed w with ith the contro controlle lled d en entit tity y that that requ require iress subst substant antial ially ly all all cash cash flows and other economic benefits to flow to the controlling entity. A sole sole gene general ral partne partnerr in a limi limited ted partn partners ershi hip p where where no oth other er party party may disso dissolve lve the  partners  part nership hip or rremo emove ve the t he gene g eneral ral partner. part ner. M

OBJ: 2 - 3

2. A pare parent nt com compa pany ny p pur urch chas ases es an an 80% 80% inte intere rest st in in a su subs bsid idia iary ry at at a pric pricee high high enough to revalue all assets and allow for goodwill on the interest purchased. If "push down accounting" were used in conjunction with the "economic entity concept," what unique procedures would be used? ANS: All assets including goodwill would be adjusted to full fair value. The method differs in that the asset adjustments would be made directly on the books of the subsidiary rather than on the consolidated worksheet. DIF:

D

OBJ: 2 - 8 | 2 - 1 0