You are on page 1of 5

Chapter 3 Solutions

28.
(Consolidated totals for an acquisition. Worksheet is produced as a
separate requirement.)
a. OBrien acquisition-date fair value .....................
OBrien book value ...............................................
Fair value in excess of book value .....................
Excess assigned to specific
accounts based on fair value

$550,000
(350,000)
$200,000
Annual
Remaining excess
life amortizations

Trademarks ............................... $100,000 indefinite


Customer relationships...........
75,000
5 yrs.
Equipment ................................. (30,000)
10 yrs.
Goodwill ....................................
55,000 indefinite
Total ........................................... $200,000

-0$15,000
(3,000)
-0-

$12,000

If the partial equity method were in use, the Income of OBrien account would
have had a balance of $222,000 (100% of OBrien's reported income for the
period). If the initial value method were in use, the Income of OBrien account
would have had a balance of $80,000 (100% of the dividends declared by
OBrien). The Income of OBrien balance is an equity accrual of $222,000
(100% of OBriens reported income) less excess amortizations of $12,000 (as
computed above). Thus, the equity method must be in use.
b.

Revenues = $1,645,000 (the accounts of both companies combined)

Cost of goods sold = 528,000 (the accounts of both companies combined)

Amortization expense = $40,000 (the accounts of both companies and the


acquisition-related adjustment of $15,000)

Depreciation expense = $142,000 (the accounts for both companies and the
acquisition-related depreciation adjustment of $3,000)

Income from OBrien = $0 (the balance reported by the parent is removed


and replaced with the subsidiarys individual revenue and expense
accounts)

Net Income = 935,000 (consolidated revenues less expenses)

Retained earnings, 1/1 = $700,000 (only the parent's retained earnings


figure is included)

Dividends declared = $142,000 (the subsidiary's dividends were attributable


to the parent and, thus, as an intra-entity transfer are eliminated)

Retained earnings, 12/31 = $1,493,000 (the beginning balance for the parent
plus consolidated net income less consolidated [parent] dividends)

Cash = $290,000 (the accounts of both companies are added together)

Receivables = $281,000 (the accounts of both companies are combined)

Inventory = $310,000 (the accounts of both companies are combined)

Investment in OBrien = $0 (the parents balance is removed and replaced


with the subsidiarys individual asset and liability accounts)

Trademarks = $634,000 (the accounts of both companies are added


together plus the 100,000 fair value adjustment)

Customer relationships = $60,000 (the initial $75,000 fair value adjustment


less $15,000 amortization expense)

Equipment = $1,170,000 (both companys balances less the $30,000 fair


value adjustment net of $3,000 in depreciation expense reduction)

Goodwill = $55,000 (the original allocation)

Total assets = $2,800,000 (summation of consolidated balances)

Liabilities = $907,000 (the accounts of both companies are combined)

Common stock = $400,000 (parent balance only)

Retained earnings, 12/31 = $1,493,000 (computed above)

Total liabilities and equities = 2,800,000 (summation of consolidated


balances)

28. (Continued)
c.

Accounts
Revenues
Cost of goods sold
Depreciation expense
Amortization expense
Income from OBrien
Net income
Retained earnings, 1/1
Net income (above)
Dividends declared
Retained earnings, 12/31
Cash
Receivables
Inventory
Investment in OBrien
Trademarks
Customer relationships
Equipment (net)
Goodwill
Total assets
Liabilities
Common stock
Retained earnings (above)
Total liabilities and equity
888,000

PATRICK COMPANY AND CONSOLIDATED SUBSIDIARY


Consolidation Worksheet
For Year Ending December 31
Consolidation Entries
Patrick
OBrien
Debit
Credit
(1,125,000)
(520,000)
300,000
228,000
75,000
70,000
(E) 3,000
25,000
-0(E) 15,000
(210,000)
-0(I) 210,000
(935,000)
(222,000)
(700,000)
(935,000)
142,000
(1,493,000)
185,000
225,000
175,000
680,000

(250,000)
(222,000)
80,000
(392,000)

(S)250,000
(D) 80,000

105,000
56,000
135,000

60,000
-0272,000
-0628,000

(771,000)
(400,000)
(1,493,000)

(136,000)
(100,000)
(392,000)

(700,000)
(935,000)
142,000
(1,493,000)
290,000
281,000
310,000

(D) 80,000

474,000
-0925,000
-02,664,000

Consolidated
Totals
(1,645,000)
528,000
142,000
40,000
-0(935,000)

(A) 100,000
(A) 75,000
(E) 3,000
(A) 55,000

(S)100,000

(S) 350,000
(A) 200,000
(I) 210,000
(E) 15,000
(A) 30,000

-0634,000
60,000
1,170,000
55,000
2,800,000
(907,000)
(400,000)
(1,493,000)

(2,664,000)
888,000

36.
(Consolidated balances three years after acquisition. Parent has applied
the equity method.)
a. Schedule 1Acquisition-Date Fair Value Allocation and Amortization
Jasmines acquisition-date fair value $206,000
Book value of Jasmine ...................
(140,000)
Fair value in excess of book value
66,000
Excess fair value assigned to specific
accounts based on individual fair values
Equipment ................................
Buildings (overvalued) ...........
Goodwill ...................................
Total .............................................

Remaining
life

$54,400
8 yrs.
(10,000)
20 yrs.
$21,600 indefinite

Annual excess
amortization

$6,800
(500)
-0$6,300

Investment in Jasmine Company12/31/15:


Jasmines acquisition-date fair value.............................
2013 Increase in book value of subsidiary ...................
2013 Excess amortizations (Schedule 1) ......................
2014 Increase in book value of subsidiary ...................
2014 Excess amortizations (Schedule 1) ......................
2015 Increase in book value of subsidiary ...................
2015 Excess amortizations (Schedule 1) ......................
Investment in Jasmine Company 12/31/15...............

$206,000
40,000
(6,300)
20,000
(6,300)
10,000
(6,300)
$257,100

b. Equity in subsidiary earnings:


Income accrual..................................................................
Excess amortizations (Schedule 1) ...............................
Equity in subsidiary earnings ...................................

$30,000
(6,300)
$23,700

c. Consolidated net income:


Consolidated revenues (add book values) ...................
Consolidated expenses (add book values) ...................
Excess amortization expenses (Schedule 1) ................
Consolidated net income ................................................

$414,000
(272,000)
(6,300)
$135,700

d. Consolidated equipment:
Book values added together ...........................................
Acquisition-date fair value allocation ............................
Excess depreciation ($6,800 3) ...................................
Consolidated equipment ...........................................

$370,000
54,400
(20,400)
$404,000

e. Consolidated buildings:
Book values added together ...........................................
Acquisition-date fair value allocation.............................
Excess depreciation ($500 3) ......................................
Consolidated buildings...............................................

$288,000
(10,000)
1,500
$279,500

f. Allocation of excess fair value to goodwill....................

$21,600

g. Consolidated common stock...........................................

$290,000

The parent's $290,000 balance appropriately shows the parent company


stockholders contributed capital (the acquired company's common
stock will be eliminated each year on the consolidation worksheet).
h. Consolidated retained earnings......................................

$410,000

Tyler's balance of $410,000 is equal to the consolidated total because


the equity method has been applied.