Consolidated Financial Statements Part 3

Part 3 31. (60 Minutes) (Consolidation worksheet and income statement with parent using initial value method. Also consolidated balances with a control premium paid by parent.) a. Fair Value Allocation and Amortization Consideration transferred by Krause............ Noncontrolling interest fair value ................. Leahy total fair value 1/1/09 ........................... Leahy book value 1/1/09 ................................ Fair value in excess of book value ............... $504,000 126,000 $630,000 (380,000) $250,000 Life Annual Excess Amortizations Excess price allocated to undervalued Building ................................................ 45,000 5 years Trademark .......................................... 60,000 10 years Goodwill .................................................... $145,000 $9,000 6,000 $15,000 Explanation of Consolidation Entries Found on Worksheet Entry *C: Convert the parent’s 1/1/10 retained earnings balance from the cash basis to the accrual basis. Entry S: Eliminates stockholders' equity accounts of subsidiary while recognizing noncontrolling interest balance (20%) as of the beginning of the current year. Entry A: Recognizes acquisition-date fair value allocations less 1 year amortization for building and trademark and increases beginning balance of the noncontrolling interest for it’s share. Entry I: Eliminates Intercompany dividend payments recorded as income by parent. Entry E: Recognizes amortization expense for current year. Columnar Entry—Recognizes noncontrolling interest's share of subsidiary's net income ($90,000 – 15,000) × 20%). 31. a. (continued) KRAUSE CORPORATION AND LEAHY, INC. Consolidation Worksheet For Year Ending December 31, 2010 Krause Corporation Leahy Inc. Sales Cost of goods sold Operating expenses Dividend income Separate company net income Consolidated net income NCI in Leahy's income Krause’s interest in consolidated income (584,000) 194,000 246,000 (16,000) (160,000) (250,000) 95,000 65,000 ______ (90,000) Retained earnings, 1/1 Net income (above) Dividends paid Retained earnings, 12/31 (700,000) (160,000) 70,000 (790,000) (350,000) (90,000) 20,000 (420,000) 296,000 504,000 191,000 680,000 100,000 0 1,580,000 390,000 144,000 0 725,000 Accounts Current assets Investment in Leahy Buildings and equipment (net) Trademarks Goodwill Total assets Liabilities Common stock Retained earnings, 12/31 (above) NCI in Leahy, 1/1 NCI in Leahy, 12/31 Total liabilities and equities Consolidation Entries Debit Credit Noncontrolling Consolidated Interest Totals (834,000) 289,000 326,000 -0- (E) 15,000 (I) 16,000 (15,000) (470,000) (320,000) (790,000) (S)350,000 (I) (*C) 44,000 (205,000) (100,000) (420,000) (*C) 44,000 (A) 36,000 (A) 54,000 (A)145,000 16,000 (725,000) (744,000) (204,000) 70,000 (878,000) 487,000 -0- (S)360,000 (A)188,000 (E) 9,000 (E) 6,000 1,097,000 292,000 145,000 2,021,000 (675,000) (320,000) (878,000) (S)100,000 (S) 90,000 (A) 47,000 (1,580,000) 4,000 219,000 15,000 (204,000) (137,000) 148,000 (148,000) (2,021,000) 31. (continued) b. KRAUSE CORPORATION AND LEAHY, INC. Consolidated Income Statement For Year Ending December 31, 2010 Sales Cost of goods sold Operating expenses Total expenses Consolidated net income $834,000 $289,000 326,000 615,000 $219,000 To 20% noncontrolling interest To controlling interest Consolidated Net income $15,000 $204,000 $219,000 c. Consideration transferred by Krause for 80% of Leahy Noncontrolling interest fair value ($4.85 × 20,000 shares) Leahy fair value Fair value of Leahy’s underlying net assets Goodwill $504,000 97,000 $601,000 485,000 $116,000 If the noncontrolling interest fair value was $4.85 per share at the acquisition date, then goodwill declines to $116,000 and the noncontrolling interest total would also decline from $149,000 to 120,000). Worksheet entries (S) and (A) assuming a $4.85 noncontrolling interest acquisition-date fair value: (S) (A) Common stock-Leahy Retained earnings- Leahy 1/1 Investment in Leahy Noncontrolling interest Buildings and equipment (net) Trademarks Investment in Leahy Noncontrolling interest Goodwill Investment in Leahy Fair value at acquisition date Relative fair values of identifiable net assets 80% and 20% of $485,000 (acquisition date fair value of net identifiable assets) Goodwill 100,000 350,000 360,000 90,000 36,000 54,000 72,000 18,000 116,000 116,000 Controlling Noncontrolling Interest Interest $504,000 $97,000 388,000 $116,000 97,000 -0- 32. (40 Minutes) (Determine consolidated balances.) Acquisition-date subsidiary fair value (given).... $850,000 Book value of subsidiary (given) ....................... (600,000) Fair value in excess of book value ..................... $250,000 Allocations to specific accounts based on difference between fair value and book value Land ................................................................ $165,000 Buildings and equipment .............................. (25,000) Copyright ........................................................ 100,000 Notes payable ................................................. 10,000 250,000 Total ...................................................... -0Annual excess amortizations: Buildings and equipment [$(25,000) ÷ 10 years] Copyright ($100,000 ÷ 20 years) Notes payable ($10,000 ÷ 8 years) Total $(2,500) 5,000 1,250 $3,750 Consolidated Totals:  Revenues = $1,900,000 (add the two book values)  Cost of goods sold = $1,085,000 (add the two book values)  Depreciation expense = $267,500 (add the two book values less $2,500 excess adjustment)  Amortization expense = $10,000 (add the two book values plus $5,000 excess adjustment)  Interest expense = $50,250 (add the two book values plus $1,250 excess adjustment)  Equity in income of Sam = -0- (eliminated so that the individual revenues and expenses of the subsidiary can be included in the consolidated figures)  Net income = $487,250 (revenues less expenses)  Retained earnings, 1/1 = $1,265,000 (parent company balance; subsidiary's operations prior to acquisition do not affect consolidated figures)  Noncontrolling interest in income of subsidiary = $26,250 ($135,000 reported income of the subsidiary less $3,750 amortization expense multiplied by 20 percent outside ownership)  Dividends paid = $260,000 (parent company balance; subsidiary's payments to parent are intercompany, payments to outside owners decrease noncontrolling interest balance) 32. (continued)  Retained earnings, 12/31 = $1,466,000 (consolidated balance on 1/1/09 plus consolidated net income less noncontrolling interest in subsidiary's income less consolidated dividends)  Current assets = $1,493,000 (add the two book values)  Investment in Sam = -0- (eliminated so that the individual assets and liabilities of the subsidiary can be included in the consolidated figures)  Land = $517,000 (add the book values plus the $165,000 excess allocation)  Buildings and equipment (net) = $1,119,500 (add the book values less the $25,000 allocation [asset was overvalued] plus the excess amortization)  Copyright = $190,000 (book value + $100,000 excess allocation less amortization for the year)  Total assets = $3,319,500  Accounts payable = $339,000 (add book values)  Notes payable = $581,250 (add the book values less $10,000 excess allocation plus amortization)  Noncontrolling interest in subsidiary = $183,250 (20% of fair value as of 1/1/09 [$170,000] plus noncontrolling interest in income of subsidiary [$26,250] less dividends paid to outside owners [$13,000])  Common stock = $300,000 (parent company balance)  Additional paid-in capital = 450,000 (parent company balance)  Retained earnings, 12/31 = $1,466,000 (computed above)  Total liabilities and equities = $3,319,500 32. (continued) Acquisition Method Accounts Father Revenues .......................................... (1,360,000) Cost of goods sold .......................... 700,000 Depreciation expense ..................... 260,000 Amortization expense ..................... -0Interest expense .............................. 44,000 Equity in income of Sam ................ (105,000) Separate company net income ...... (461,000) Consolidated net income ................ Noncontrolling interest in Sam's income Controlling interest in CNI ............. Sam (540,000) 385,000 10,000 5,000 5,000 -0(135,000) Consolidation Entries Debit Credit (E) Noncontrolling Consolidated Interest Totals (1,900,000) 1,085,000 267,500 10,000 50,250 -0- 2,500 (E) 5,000 (E) 1,250 (I) 105,000 (26,250) Retained earnings 1/1 .................... Net income (above) ......................... Dividends paid ................................ Retained earnings 12/31 .......... Current assets ................................. Investment in Sam .......................... (1,265,000) (461,000) 260,000 (1,466,000) 965,000 733,000 (440,000) (135,000) 65,000 (510,000) 528,000 Land .................................................. Buildings and equipment (net)....... Copyright ......................................... Total assets ............................... Accounts payable ........................... Notes payable .................................. NCI in Sam 1/1 .................................. NCI in Sam 12/31 ...................................................... Common stock ................................ Additional paid-in capital ................ Retained earnings 12/31 … (above) Total liab. and stockholders' equity 292,000 877,000 -02,867,000 (191,000) (460,000) 60,000 265,000 95,000 948,000 (148,000) (130,000) (300,000) (450,000) (1,466,000) (2,867,000) (100,000) (60,000) (510,000) (948,000) (S) 440,000 (D) 52,000 13,000 (D) 52,000 (S) 480,000 (I) 105,000 (A) 200,000 (A) 165,000 (E) 2,500 (A) 25,000 (A) 100,000 (E) 5,000 (A) 10,000 (E) 1,250 (S) 120,000 (A) 50,000 (S) 100,000 (S) 60,000 (487,250) 26,250 (461,000) (1,265,000) (461,000) 260,000 (1,466,000) 1,493,000 -0517,000 1,119,500 190,000 3,319,500 (339,000) (581,250) (170,000) (183,250) (183,250) (300,000) (450,000) (1,466,000) (3,319,500) 33. (55 Minutes) (Consolidated worksheet) a. Consideration transferred by Adams Noncontrolling interest fair value Acquisition-date total fair value Book value of Barstow (CS + RE 12/31/09) Excess fair value over book value Land Buildings Equipment Patents Notes payable Goodwill Total b. $603,000 67,000 $670,000 (460,000) $210,000 Annual Excess Life Amortizations — — 10 years ($2,000) 5 years 8,000 10 years 5,000 5 years 4,000 $30,000 (20,000) 40,000 50,000 20,000 120,000 $90,000 indefinite -0$15,000 Because investment income is exactly 90 percent of Barstow's reported earnings, Adams apparently is applying the partial equity method. Explanation of Consolidation Entries Found on Worksheet Entry *C—Converts Adams's financial records from the partial equity method to the equity method by recognizing amortization for 2010. Total expense was $15,000 but only 90 percent (or $13,500) applied to the parent. Entry S—Eliminates subsidiary's stockholders' equity while recording noncontrolling interest balance as of January 1, 2011. Entry A—Records unamortized allocation balances as of January 1, 2011. The acquisition method attributes 10 percent of these amounts to the noncontrolling interest. Entry I—Eliminates intercompany income accrual for 2011. Entry D—Eliminates intercompany dividend transfers. Entry E—Records amortization expense for current year. Columnar Entry—Recognizes noncontrolling interest's share of Barstow's net income as follows: Noncontrolling Interest in Barstow's Income (Columnar Entry) Barstow reported income ............................................................. Excess amortization expenses 2011 ............................................. Adjusted income of Barstow ................................................... Noncontrolling interest ownership .............................................. Noncontrolling interest in Barstow's income ........................ $120,000 (15,000) $105,000 10% $10,500 33. b. (continued) Revenues Cost of goods sold Depreciation expense Amortization expense Interest expense Investment income Separate company net income Consolidated net income Income to noncontrolling interest Income to controlling interest ADAMS CORPORATION AND BARSTOW, INC. Consolidation Worksheet-Acquisition Method For Year Ending December 31, 2011 Adams Corp. Barstow Inc. (940,000) 480,000 100,000 (280,000) 90,000 55,000 40,000 (108,000) (428,000) 15,000 Interest (1,367,000) (340,000) (428,000) 110,000 (1,685,000) (120,000) 70,000 (390,000) Current assets Investment in Barstow 610,000 702,000 250,000 Land Buildings Equipment Patents Goodwill Total assets 380,000 490,000 873,000 150,000 250,000 150,000 (E) 6,000 (E) 5,000 (E) 4,000 (I) 108,000 (C*) 13,500 (S) 340,000 Totals 800,000 (860,000) (510,000) (1,685,000) (230,000) (180,000) (390,000) (A) (E) (A) (A) (A) 30,000 2,000 32,000 45,000 90,000 (A) 16,000 (S) 180,000 (800,000) 7,000 560,000 724,000 1,047,000 40,000 90,000 3,321,000 (A) 18,000 (E) 8,000 (E) 5,000 (E) (414,500) 110,000 (1,658,000) 860,000 -0- (*C) 13,500 (S) 468,000 (A) 175,500 (I) 108,000 4,000 (S) 52,000 (A) 19,500 Noncontrolling interest (425,000) 10,500 (414,500) (1,353,500) (D) 63,000 (D) 63,000 3,055,000 (3,055,000) Consolidated (1,220,000) 570,000 161,000 5,000 59,000 -0- (10,500) Net income Dividends paid Retained earnings, 12/31 Total liabilities and stockholders' equity Noncontrolling Credit (120,000) Retained earnings, 1/1 Notes payable Common stock Retained earnings, 12/31 Debit (1,078,000) (510,000) (1,658,000) (71,500) (75,000) (75,000) (3,321,000) 34. (25 minutes) (Consolidated balances after a mid-year acquisition) a. Investment account balance indicates the initial value method. Consideration transferred ....................... $526,000 Noncontrolling interest fair value ........... 300,000 Duncan acquisition-date fair value ......... 826,000 Book value of Duncan (below) ................. (765,000) Fair value in excess of book value ......... $61,000 Excess assigned Annual Excess based on fair value: Life Amortizations Equipment ....................................... (30,000) 5 years $(6,000) Goodwill ......................................... $91,000 indefinite -0Total ..................................................... $(6,000) Amortization for 9 months ................. $(4,500) Acquisition-Date Subsidiary Book Value Book value of Duncan, 1/1/09 (CS + 1/1 RE) ........... $740,000 Increase in book value-net income (dividends were paid after acquisition) ............................... $100,000 Time prior to purchase (3 months) ......................... ×¼ 25,000 Book value of Duncan, 4/1/09 (acquisition date) ... $765,000 Consolidated Income Statement: Revenues (1) Cost of goods sold (2) Operating expenses (3) Consolidated net income Noncontrolling interest in CNI (4) Controlling interest in CNI $825,000 $405,000 214,500 619,500 205,500 28,200 $177,300 (1) $900,000 combined revenues less $75,000 (preacquisition subsidiary revenue) (2) $440,000 combined COGS less $35,000 (preacquisition subsidiary COGS) (3) $234,000 combined operating expenses less $15,000 (preacquisition subsidiary operating expenses) less nine month excess overvalued equipment depreciation reduction of $4,500 (4) 40% of post-acquisition subsidiary income less excess amortization b. Goodwill = $91,000 (original allocation) Equipment = $774,500 (add the two book values less $30,000 reduction to fair value plus $4,500 nine months excess amortization) Common Stock = $630,000 (parent company balance only) Buildings = $1,124,000 (add the two book values) Dividends Paid = $80,000 (parent company balance only) 35. (40 minutes) Determine consolidated balance for a mid-year acquisition. a. Consideration transferred by Truman ......... $720,000 Noncontrolling interest fair value ................ 290,000 Atlanta’s acquisition-date total fair value ..... $1,010,000 Book value of Atlanta ..................................... (840,000) Fair value in excess of book value ................ $170,000 Annual Excess Excess fair value assigned Life Amortizations Patent ........................................................ 100,000 5 years $20,000 Goodwill ...................................................... $70,000 indefinite -0Total ......................................................... $20,000 b. Fair values at acquisition date Relative fair values of identifiable net assets 70% and 30% of $940,000 (acquisition date book value plus patent = net asset fair value) Goodwill c. Controlling Noncontrolling Interest Interest $720,000 $290,000 Initial value at acquisition date Truman’s share of Atlanta’s income for half year ([$120,000 – 20,000 amortization × ½ year] × 70%) Dividends 2009 ($80,000 × ½ year × 70%) Investment account balance 12/31/09 658,000 $62,000 282,000 $8,000 $720,000 35,000 (28,000) $727,000 35. (continued) d. Consolidated Worksheet Truman Atlanta Revenues (670,000) (400,000) Operating Expenses Income of subsidiary Separate company net income Consolidated net income NCI in Atlanta's income Controlling interest in CNI 402,000 (35,000) (303,000) (120,000) Retained earnings, 1/1 Net income (above) Dividends paid (823,000) (303,000) 145,000 (500,000) (120,000) 80,000 Retained earnings, 12/31 (981,000) (540,000) Current assets Investment in Atlanta 481,000 727,000 390,000 Land Buildings 388,000 701,000 200,000 630,000 280,000 (S)200,000 (E) 10,000 (I) 35,000 NCI (S)140,000 552,000 0 (S) 500,000 2,297,000 1,220,000 Liabilities (816,000) (360,000) Common stock Additional paid-in capital Retained earnings, 12/31 (95,000) (405,000) (981,000) (300,000) (20,000) (540,000) (1,220,000 ) 145,000 (981,000) 871,000 0 (S)588,000 (I) 35,000 (A)132,00 0 (E) 10,000 90,000 70,000 2,950,000 (1,176,000) (S) 300,000 (S) 20,000 (95,000) (405,000) (981,000) (A) 38,000 (S)252,000 (2,297,000) 12,000 588,000 1,331,000 (A) 100,000 (A) 70,000 Goodwill Total assets (318,000) 15,000 (303,000) (823,000) (303,000) (S) 40,000 (D) 28,000 (D) 28,000 Cons. (870,000) (15,000) Patent Noncontrolling interest, 7/1 Noncontrolling interest, 12/31 Total liabilities and stockholders' equity Adjustments & Eliminations 1,263,000 1,263,000 (290,000 ) 293,000 (293,000) (2,950,000)