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Dr. M.D.

Chase
Advanced Accounting-305-16B

Long Beach State University
Purchase: Analysis/Eliminations
Page 1

I. PURCHASE EXAMPLE WITH ANALYSIS, ELIMINATIONS AND WORKSHEET
Facts:
1.

“P" pays $790,000 for 80% of "S" (8,000) shares on 3/1/x1.

2.

$25,000 of direct acquisition costs are also incurred in the purchase, of which $15,000 covered SEC related expenses.

3.

At the time of the purchase "S" had the following balance sheet:
Historical
Assets
Inventory..........................

Dr. (Cr)

Cost
$

Land...............................

FMV

75,000 $

Difference
80,000

150,000

200,000

Building ..........................

600,000

500,000

A/D-Building..

(300,000)

Equipment..........................

150,000

A/D-Equipment.

(50,000)

Goodwill...........................

$

5,000
50,000
200,000 net

80,000

( 20,000)
Note the presence of pre-existing
GW…What implications does this
have for your analysis?

125,000

Total assets................. $

750,000

Liabilities and Equities
Current............................

$

Bonds (6% due 12/31/x4)......

50,000 $
200,000

50,000

Common Stock ($10 par)......... 100,000

n/a

PIC in excess of par

150,000

n/a

250,000

n/a

Retained earnings..............
Total liabilities........

$

$

186,752

750,000

0
13,248

$

243,248

$

194,598

.8

Remember: This represents the
excess of cost>BV necessary to bring
all the accounts up to FMV…

OTHER DATA:
a)

the remaining life of the building is 20 years

b)

the remaining life of the equipment is 5 years

c)

the market rate of interest on the bond is 8%.

d)

“S” had net income of $70,000 (of which $10,000 was earned prior to 3/1/x1) and paid dividends of $20,000 in year x1.

e)

During year x1 "P" and "S" had the following totals:
"P"
Sales....

350,000

"S"
210,000

COS.....

150,000

80,000

Expenses....

120,000

60,000

REQUIRED:
a.

This is critical information. Remember, “P” is not
entitled to consolidate income earned by “S” prior
to the purchase. This represents “Purchased NI”
and must be accounted for (eliminated) during the
analysis of the investment.

Analyze the investment

b. Analyze the investment assuming that "P" had paid only $490,000 instead of $790,000 as above.
c.

Analyze the investment assuming that "P" had paid only $390,000.

d. present the consolidated elimination entries for requirement a.
e.

compute total NI; MI NI; controlling NI; MI

f.

prepare the consolidated worksheet

. REMEMBER: ALL GOODWILL RECOGNIZED IN THE CONSOLIDATION MUST BE A RESULT OF THE PURCHASE AND NOT PREEXISTING… 100.000)......000 40. 100. 10.... 4.000)......000 prior to acquisition....000)............. Be certain you note how pre-existing GW is treated… 100..........8)(5.. Req... $ Purchased BV C/S: Remember: All charges related to SEC or stock issuance costs are expensed in a purchase consolidation.....000 FMV accounts (CA.......8) .000 cr)..402 NCA: Land (..308 155. 4.... 200... This is income that “P” is not entitled to include in the consolidated net income and therefore must be accounted for in the purchase...000 100....... (16........ Do you understand what it is and how it was computed? Attributable to: Purchased net income: .... Chase Advanced Accounting-305-16B Long Beach State University Purchase: Analysis/Eliminations Page 2 SOLUTION-REQUIREMENT a: Analyze the investment: A.000 Attributable to: Purchased net income: ....000 Excess of cost over BV........000)(. 800.....8)(13.771 Equipment (...000 100.......... 8........MES): Inventory (...8)(13..8)(5.. NCA FMV FMV TV Val BV Land 200 200/ 617........... other charges are capitalized.000 RE: 250...000 (. purchased NI is 10.8)(20.....000 Cost ($790.......000 Cost ($490..8) ...... 293.598 Available to NCA: 177. 38...Liabilities.......MES): Inventory (.000 (..000 780 Build 500 500/ 617.8)(50.........8)(200....000 500..598 Available to NCA: Purchased NI is Subsidiary NI earned prior to the purchase in the year of purchase.. In this case you were told that “S” earned $10......598 22......248).667) Excess available to GW.. Purchased BV C/S: $ 500......... 402 Allocate to NCA in proportion of relative FMV.....000 Add: Preexisting GW........402 780 Adj...000 Excess of cost over BV..000 160........ 400..308 Building (See table).. 177..000 + $10...000 FMV accounts (CA...000 Adjusted excess:.000 RE: 250......667) 177.D....598 477............ Since “P” acquired and 80% interest..........000 500.......... 400..000 Add: Preexisting GW (125.000+100....402 158..308 120.. Equipment (..000 (16. Rel..402 395... Purchased NI is another problematic issue.....000 + $10.402 + (150..Liabilities.........000 780 Equip 80 80/7 617.. 38........000 184...402 63..000)....... . $ Rel % Adj..248)............000).000 PIC: 150........402 NCA: Land (See table)...000) Liabilities (.000 As noted on the prior page..8) or $8....402 -0- Excess Available to NCA + (BV of NCA)(% ownership) $177..402 SOLUTION-REQUIREMENT b: Analysis based on cost of $490.. It is essential to take note that this is GW created by the purchase after eliminating (adding back) the pre-existing GW..............000) Balance to Goodwill.000(...000 PIC: 150..Dr. M..... Building (...............8). 22.8)= $617.....000 80 Total 780 780/ 617...... 400.000 Adjusted excess:... Analysis based on cost of $790.. 500...323 80..402 .000 Liabilities (.000)(..........771 (16..000 cr).000+300.......771 240......000 402 10.8)(20. 155.... 8...

......000+100........668 (26... $ Rel % Adj..8) 160....... 1.000 You are expected to understand how to use the “effective interest method” of bond amortization necessary to solve this problem.... Rel...... 12..........000).. 4.... Eliminate current year investment account entries: Equity in "S" NI.8)(13.. 6.000 Excess of cost over BV. -0- SOLUTION-REQUIREMENT d: Consolidated elimination entries based on requirement (a) (Parent is on the equity method) a...MES): Inventory (....667 Note that GW is not subject to amortization.8)($50...000-186.....667 120....000 80 Total 780 780/ 617..344 9...067 80.....000 FMV accounts (CA..8) .....8)($100... Purchased BV C/S: $ 400.... 80..000 Cost ($390.... 2..........754 2 12.000). 16...........744 157..402 16... 100........... 2..667 Discount on B/P (2.000).......402 780 91..... 10.933) 77.402 53....667 A/D PP&E ($160. Allocate the excess of cost over book value per analysis: Purchased NI (....563 9... 32..960** Depreciation expense-building. NCA FMV FMV TV Val BV Land 200 200/ 517..Liabilities. 8.000 Goodwill (per analysis).000 (..... 12.000 100 PIC: 150 RE: 250 500 (...... Equipment (See table)........8)($200......... Amortize the excess of cost over book value (the dif.140 9.402 1 11.000 A/D Building (.........000 Liabilities (per analysis)...... 8...........590 22.. GW is checked annually for “impairment” and written off against NI (expensed) if its value has declined : 8% 6% Effective Stated Rate Rate Amort.......960 A/D (16.000 COS (inventory assumes FIFO)(. -0- Add: Preexisting GW.... 40..402 Land (See table)...... ** Carrying value of bonds at 1/1/x1: $200..000). 193..8) = Less: discount (200..Dr....... 10.000 Investment in "S"....592 9..000 Adjusted excess:.000/20) (10/12). 160....667 Building (See table)..000).. between values based on "P" life and values and "S" life and values) Depreciation expense (8....... 402 Allocate to NCA in proportion of relative FMV.....352)(10/12) 1........ If you don’t...000 10. Carrying Value 0 149....... 6........600 2............ please review your Intermediate Accounting and/or see me at office hours.....639 10.598 Available to NCA: NCA: Adj.D..000 Dividends..000 780 Build 500 500/ 517....... 4......000/5) (10/12).....402 77...000 + $10....... b...........000).668 240..000)(. M....... Excess Available to NCA + (BV of NCA)(% ownership) $77..8)($150.... 48.8)($250......667 Year Bond Amortization Expense (2........402 Equipment (......600 2..599 ..... 120..540 154. Eliminate "P" pro rata share of "S" SHE: "S" C/S (..963 160..000 d.......402 331.598 Land (......248).....000).. 400.... 200.. 400. Chase Advanced Accounting-305-16B Long Beach State University Purchase: Analysis/Eliminations Page 3 SOLUTION-REQUIREMENT c: Analysis based on cost of $390.933) 77.038 4 12.. 400..000 Investment in "S"..352)(10/12).001 Total 48.000 "S" PIC (...600 2..000+300..000 Attributable to: Purchased net income: .668 (26.402 Excess available to GW.......667 91...8)($5.8)(5.................000 Investment in "S"....8)(10...........000).402 132...402 + (150....000 Liabilities (....000 "S" RE (...8)= $517.294 3 12.........000 780 Equip 80 80/7 517............598 Carrying Value 149.............600 2.752)(.8)($20.....000)...352 151.000).. Req.000)(10/12).... 100.000 c...

960 ( 70.....000) 8.667) Depreciation Expense-Building (Downsream) ( 80.......040) SOLUTION-REQUIREMENT f: The consolidated worksheet can be created and checked against the results of part e above....667-8..000) 185..............D.. to Controlling interest PIGNI+P%(SADJNI)+DNCR-DNDR)=-(80....000) (210.000 80.000)+2..000) Cost of goods sold.....Dr..627..........000)+(..000 6. 1..667 Amortization Expense (Downstream)....000 Dr 230.....................040 income (144...... (350..000 income 130. MI net income and controlling interest net income Adjustments/Eliminations _ "P" Inc....... Consolidated CR ( 144...........667) Total net [income] loss. Total Income of the Consolidated Entity Net Income ( 560...........627 ( 2............ "S" Inc......... to Minority interest (MI%)(SIGNI+UPCR-UPDR)=(.960 (2...... compute total net income. 120.000)....040) 14.......... M.... Internally Generated Net Income........000 60..000 Expenses... ....... 150.2)(70... Chase Advanced Accounting-305-16B Long Beach State University Purchase: Analysis/Eliminations Page 4 e.........................8)(70...........000) Depreciation Expense (Downstream)..... Sales...............