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Advanced Financial Accounting


Question(1)
On January 1, 2008, Chariot Company acquired 100 percent of Stryder Company for $220,000 cash. The trial balances for the two companies on December 31, 2008, included the following amounts:

On the acquisition date, Stryder reported net assets with a book value of $170,000. A total of $10,000 of the acquisition price is applied to goodwill, which was not impaired in 2008. Stryder's depreciable assets had an estimated economic life of 10 years on the date of acquisition. The difference between fair value and book value of tangible assets is related entirely to buildings and equipment. Chariot used the equity method in accounting for its investment in Stryder. Analysis of receivables and payables revealed that Stryder owed Chariot $10,000 on December 31, 2008.

Required:
1- Prepare the entry for acquisition 2- Prepare all adjusting and eliminating entries needed to prepare consolidated financial statements on December 31, 2008.

Solution
First: Preparing the entry for acquisition:
Investment in (s) Cash 220000 220000

Second : Preparing the adjusting and eliminating entries of the worksheet after one year of acquisition:
The steps are: 1) Amount paid for acquisition: = 220000

2) The share of parent co. in the B.V. of net assets of the subsidiary co. = (net assets * %) B.V. of net assets = B.V. of O.E. of the subsidiary. =100000+70000 = 170000 ( given in the question ) The share of parent co.= 170000 * 100% = 170000 3) Calculating the differential : Amount paid for acquisition -The share of parent co. in the B.V. of net assets 220000 (170000)

---------Differential + 50000 4) Calculating the difference between the market value and the book value of the assets and liab. of the subsidiary co.: We do not have the market value of assets and liab. But we have the amount of the goodwill and according to our problem The difference between fair value and book value of tangible assets is related entirely to buildings and equipment. So we can calculate the change in buildings and equipment in the next step. (5) Calculating the goodwill: The differential ( step 3) +50000 (-)Allocated as follow: + The increase of Buildings (40000*100%) = +40000 complementary (40000) Goodwill + 10000 (given)

(6) Determining the amortization for the differential: The asset Allocated amount Useful life Buildings &Equip. Goodwill*

Amortization exp.

40000 10 ys 4000 10000 ----------------------------------------------50000 4000 * The goodwill was not impaired in 2008.It means no amortization for goodwill.

(7) Preparing the entries of the worksheet:


1-Recording the allocation differential(step 5): of the

Buildings &Equipment Goodwill Differential 2- Closing the differential in investment account: Differential Investment in (S)

40000 10000 50000

50000 -----------50000 -------------

3- Eliminating the equity method effect: Investment revenue Dividends Investment in S ----------------------------------------------a- Investment revenue* ( given) (Income from sub.) b- Dividends of S. ** ( given) c- Investment in S complementary. -----------------------------------------------4- The amortization for the differential: Expenses (amortization) Building& Equipment ----------------------------------------------51000* 15000** 36000

-----------

-------------

4000 ----------4000 ------------

5-Eliminating the O.E. of (S) investment in (S) account(1/1/2008): Common stock - (S) RE(S) Investment in (S) ----------------------------------------------6- Eliminating the intra transactions: AP AR -----------------------------------

and

100000 70000 170000

10000 10000

Question(2)
Instead of asking for preparing the entries, the requirement may be as follows:
1) Based on the information provided , the differential associated with this acquisition is: Amount paid for acquisition -The share of parent co. in the B.V. of net assets Differential 2) Based on the information provided, The Differential assigned to buildings = Differential - G.W. = 50000 10000 = 40000 220000 (170000)

---------+ 50000

and

equipment:

3) Based on the information provided, the amount of differential assigned to buildings and equipment that is amortized for the year is: .. Amortization of buildings & Equip. = 40,000 / 10 years = 4,000

4) Based on the information provided, what amount of retained earnings will be reported in the consolidated financial statements for the year?

Consolidated amount for RE = The bal. of RE of the parent co.


= Beg.RE (parent) + NI (parent) - Dividends (parent) 200,000 171,000* (40000) 331000

Note : we calculate the NI of parent by preparing the IS as follows:


Revenues : sales Income from sub**. 500000 51000 551000

- Expenses COGS Dep. exp. Other exp. NI

270000 30000 80000 (380000) 171000*

Note: Income from sub**. means investment revenue . 5) Based on the information provided, what amount of net income will be reported in the consolidated financial statements for the year? Consolidated NI = NI of parent = 171,000

6) Based on the information provided, what amount of total assets will be reported in the consolidated balance sheet for the year?

Consolidated amount of total assets :


= B.V. of assets (parent)
=(50000+60000+75000+60000+300000 - 120000Acc.dep.) = 425000

+ F.V. of assets (Sub.)


= (30000+40000+80000+40000+120000 - 48000Acc.dep. + 40000 the increase of build. & equip*) =

+ G.W. * - Amortization (build.) - Intra transaction

302000 10000 (4000) (10000) 723,000

Notes:
1-The B.V. of assets (parent) do not include the investment in S acc. 2-The differential* 50000 includes the increase in build. 40000 & GW 10000.

Question (3)
Alnasr Company acquired 100% of the common stock of Tanta Company by issuing 10000 shares of $5 par common stock with a market value of $30 per share. Summarized balance sheet data for the two companies immediately preceding the acquisition are as follows: Alnasr Company Book value Markrt value $600000 $750000 $400000 $350000 200000 Tanta Company Book value Markrt value $450000 $650000 $300000 $375000 150000

Total assets Total liabilities Stockholders equity

Required:
Determine the following amounts to be presented in the consolidated balance sheet at the date of acquisition:

(1)The amount of total assets:


= B.V. of assets (parent) + F.V. of assets (Sub.) + G.W. - Intra transaction 600000 650000 25000* 000 ------------1275000

*We have to calculate the G.W. as follows: 1-Amount paid for acquisition: M.V. of shares = 10000x 30 = $300,000 2-The share of parent co. in the B.V. of net assets of the subsidiary co. = (net assets * %) B.V. of net assets = B.V. of O.E. of the subsidiary. = 150,000. The share of parent co.: = 150,000 X 100% = 150,000

3-Calculating the differential : Amount paid for acquisition -The share of parent co. in the B.V. of net assets Differential

300,000 (150,000) ---------+ 150000

4-Calculating the difference between the market value and the book value of the assets and liab. of the subsidiary co.: Increase in assets = 650000 450000 = 200000 Increase in liab. = 375000 300000 = 75000 5- Calculating the goodwill(or gain from purchase): The goodwill is calculated as follows: The differential ( step 3) 150000 (-)Allocated as follow: +The increase of assets 200000*100% = 200000 -The increase of liab. 75000 * 100% (75000) (125000) Goodwill + 25000 -----------------------------------------------------------------------------------------

(2)The amount of total liabilities:


= B.V. of liab. (parent) + F.V. of liab. (Sub.) - Intra transaction 400000 375000 000 -------------775000 -----------------------------------------------------------------------------------------

(3)The amount of total Stockholders equity:


Stockholders equity of parent only: = The bal. in B.SH. = 200000 + Investment in Tanta* (10000 shares x 30) = 300000 500000 * Because Alnasr Co. issued 10000 shares for acquisition and the market value of $30 per share.

Question(4)
Paco Company acquired 100 percent of the stock of Garland Corp. on December 31, 2008. The stockholder's equity section of Garland's balance sheet at that date is as follows:

Paco financed the acquisition by using $880,000 cash and giving a note payable for $400,000. Book value approximated fair value for all of Garland's assets and liabilities except for buildings which had a fair value $60,000 more than its book value and a remaining useful life of 10 years. Any remaining differential was related to goodwill. Paco has an account payable to Garland in the amount of $30,000.

Required:
Present all eliminating entries needed to prepare a consolidated balance sheet immediately following the acquisition.

Solution Preparing the entries of the worksheet at the date of acquisition:


The steps are:

(1)

Amount paid for acquisition:


Cash = $880,000 Note payable = $440,000 $1,280,000

(2)

The share of parent co. in the B.V. of net

assets of the subsidiary co. = (net assets * %) B.V. of net assets = B.V. of O.E. of the subsidiary = 1,200,000. The share of parent co. = 1,200,000 X 100% = 1,200,000

(3)

Calculating the differential :


1,280,000 (1,200,000)

Amount paid for acquisition -The share of parent co. in the B.V. of net assets Differential

---------+ 80000

(4) Calculating the difference between the market value and the book value of the assets and liab. of the subsidiary co.:
Building + 60,000 (given)

(5) Calculating the goodwill(or gain from purchase):


The goodwill is calculated as follows: The differential ( step 3) (-)Allocated as follows: +The increase of Building (60000*100%) = Goodwill +80000 ( 60000) + 20000

(6) Preparing the entries of the worksheet:


1) Recording the differential,G.W. and the difference in assets and liab. values (step 5): Building Goodwill Differential 2) Closing the differential in investment account: Differential Investment in (S) --------------------------------------------3) Eliminating the O.E. of (S) and investment in (S) account: Common stock - (S) APIC- (S) RE(S) Investment in (S) ---------------------------------------------------4) Eliminating the intra transactions: AP AR ----------------------------------------------------60000 20000 80000

80000 -----------80000 -------------

300000 400000 500000 ------------30000 30000 1200000 -------------