Consolidated Financial Statements Part 4

Part 4 36. (60 minutes) (Consolidated statements for a step acquisition) a. Fair value of Sysinger 1/1/10 (given) Book value of Sysinger 1/1/10 (CS + APIC + RE) Excess fair value over book value To customer contract (4 year life) To goodwill b. Equity in earnings of Sysinger 2010 income (150,000 × 95%) Amortization (100,000 × 95%) Equity in earnings of Sysinger $142,500 (95,000) $47,500 Revaluation of 15% block to fair value Consideration transferred 2009 Income (100,000 × 15%) 2009 dividends (30,000 × 15%) Book value at 1/1/10 Fair value at 1/1/10 Gain on revaluation $184,500 15,000 (4,500) 195,000 262,500 $67,500 Investment account balance 12/31/10 Fair value at 1/1/10 (15% block) Consideration transferred 1/1/10 (80% block) Equity earnings 2010 2010 income (95% × 150,000) Customer contract amortization Dividends 2010 (40,000 × 95%) Investment in Sysinger 12/31/10 $1,750,000 1,300,000 450,000 400,000 $50,000 $262,500 1,400,000 142,500 (95,000) 47,500 (38,000) $1,672,000 36. (Continued) c. Accounts Revenues Operating expenses Equity earnings of Sysinger Gain on revaluation Separate company net income Consolidated net income NCI in Sysinger’s income Allan’s share of CNI Allan and Sysinger Consolidation Worksheet For Year Ending December 31, 2010 Allan Sysinger Consolidation Entries Company Company Debit Credit (931,000) (380,000) 615,000 230,000 (E)100,000 (47,500) -0(I) 47,500 (67,500) -0(431,000) (150,000) (2,500) Retained earnings, 1/1 Net income Dividends paid Retained earnings 12/31 (965,000) (431,000) 140,000 (1,256,000) (600,000) (150,000) 40,000 (710,000) Current assets Investment in Sysinger 288,000 1,672,000 540,000 -0- 826,000 850,000 -0- 590,000 370,000 -0-01,500,000 Property, plant, and equipment Patented technology Customer contract Goodwill Total assets Noncontrolling Consolidated Interest Totals (1,311,000) 945,000 -0(67,500) 3,636,000 Liabilities Common stock Additional paid-in capital Retained earnings 12/31 NCI in Sysinger, 1/1 (1,300,000) (900,000) (180,000) (1,256,000) -0- (90,000) (500,000) (200,000) (710,000) -0- NCI in Sysinger, 12/31 Total liab. and stockholders' equity -0(3,636,000) -0(1,500,000) (S) 600,000 (D) 38,000 (D) 38,000 (S)1,235,000 (I) 47,500 (A) 427,500 (A) 400,000 (A) 50,000 (E) 100,000 2,000 (965,000) (431,000) 140,000 (1,256,000) 828,000 -0- 1,416,000 1,220,000 300,000 50,000 3,814,000 (1,390,000) (900,000) (180,000)) (1,256,000) (S) 500,000 (S) 200,000 (S) 65,000 (A) 22,500 1,935,500 (433,500) 2,500 (431,000) 1,935,500 (87,500) (88,000) (88,000) (3,814,000) 37. (60 minutes) (Step acquisition—control previously acquired.) a. According to the acquisition method, the valuation basis for a subsidiary is established on the date control is obtained, in this case January 1, 2009. Subsequent acquisitions are valued consistent with this initial value after adjusting the investment for subsidiary income and other changes. Because subsequent acquisitions are considered as transactions in the parent’s own equity, no gains or losses are recorded. Differences in cash paid and the underlying value are recorded as adjustments to APIC. Fair value of Keane Company 1/1/09 ($573,000 ÷ 60%) Keane income 2009 Excess fair value amortization for copyright Keane dividends 2009 Initial fair value adjusted to 1/1/10 Percent acquired in step acquisition Value assigned to 30% acquisition Cash paid for the 30% acquisition Credit to APIC from 30% step acquisition $955,000 150,000 (20,000)* (80,000) $1,005,000 30% 301,500 300,000 $1,500 *Fair value of Keane Company 1/1/09 ($573,000 ÷ 60%) Book value of Keane Company 1/1/09 (given) Excess fair value over book value To copyright (6 year life) To goodwill $955,000 810,000 145,000 120,000 $25,000 Entry to record 30% additional investment in Keane: 1/1/10 Investment in Keane Cash APIC from step acquisition 301,500 b. Investment in Keane Company 1/1/09 2009 Equity earnings [60% × (150,000 – 20,000)] 2009 Dividends received (60% × $80,000) Additional acquisition of 30% interest 2010 Equity earnings [90% × (180,000 – 20,000)] 2010 Dividends received (90% × $60,000) Investment in Keane Company 12/31/10 300,000 1,500 $573,000 78,000 (48,000) 301,500 144,000 (54,000) $994,500 37. (continued) part c. BRETZ, INC. AND KEANE COMPANY Consolidation Worksheet Year Ending December 31, 2010 Accounts Revenues Operating expenses Equity in Keane’s income Separate company net income Consolidated net income NCI in Keane’s income Bretz’s share of CNI Bretz, Inc. (402,000) 200,000 (144,000) (346,000) Retained earnings, 1/1 Net income (above) Dividends paid Retained earnings, 12/31 (797,000) (346,000) 143,000 (1,000,000) Current assets Investment in Keane Company Trademarks Copyrights Equipment (net) Goodwill Total assets Keane Co. (300,000) 120,000 Consolidation Entries Noncontrolling Consolidated Debit Credit Interest Totals (702,000) (E) 20,000 340,000 (I) 144,000 (180,000 (16,000) 224,000 994,500 (500,000) (180,000) 60,000 (620,000) (S) 500,000 (D) 54,000 6,000 190,000 106,000 210,000 380,000 600,000 300,000 110,000 1,914,500 1,200,000 (D)54,000 (S) 792,000 (A) 112,500 (I) 144,000 (A)100,000 (E) 20,000 (453,000) (400,000) (60,000) (1,500) (1,000,000) (200,000) (300,000) (80,000) Non-controlling interest 12/31 Total liabilities and equities (1,914,500) (1,200,000) 706,000 590,000 490,000 25,000 2,225,000 (653,000) (400,000) (60,000) (1,500) (1,000,000) (S)300,000 (S) 80,000 (620,000) 1,223,000 (797,000) (346,000) 143,000 (1,000,000) 414,000 0 (A) 25,000 Liabilities Common stock Additional paid-in capital APIC-step acquisition Retained earnings,12/31 (362,000) 16,000 (346,000) (A) 12,500 (S) 88,000 1,223,000 (100,500) 110,500 (110,500) (2,225,000) 38. (30 Minutes) (Determine consolidated balances when parent uses equity method. Includes sale of a portion of the investment) Purchase Price Allocation and Excess Amortizations Purchase price ......................................... $250,000 Book value acquired ($230,000 × 70%) ................................. 161,000 Price in excess of book value ................. $89,000 Annual Excess Allocation based on fair value ................. Life Amortizations Land ($10,000 × 70%) $7,000 Equipment ($68,000 × 70%) 47,600 14 yrs. $3,400 Liabilities ($20,000 × 70%) 14,000 10 yrs. 1,400 68,600 Goodwill ................................................... $20,400 indefinite -0Total ......................................................... $4,800 The parent uses the equity method: Investment income of $44,200 = $49,000 (70% × $70,000) less $4,800 amortization expense. Bon Air (694,800) 630,000 (44,200) Creedmoor (250,000) 180,000 -0- Net income (109,000) (70,000) Retained earnings, 1/1/09 Net income Dividends paid (760,000) (109,000) 68,000 (260,000) (70,000) 10,000 Retained earnings, 12/31/09 (801,000) (320,000) Current assets Investment in Creedmoor 72,000 321,800 120,000 -0- Land Buildings (net) Equipment (net) Goodwill 241,000 289,000 165,200 -0- 50,000 200,000 40,000 -0- Total assets 1,089,000 410,000 Liabilities Common stock Additional paid-in capital Noncontrolling interest 1/1/09 Noncontrolling interest 12/31/09 (180,000) (50,000) (58,000) (50,000) (40,000) -0- Retained earnings, 12/31/09 (801,000) (320,000) Total liabilities and equities (1,089,000) (410,000) Revenues Operating expenses Investment income Noncontrolling int(E)erest in Creedmoor income Adjustments & Eliminations NCI Consolidated (944,800) 814,800 -0- (E) 4,800 (I) 44,200 (21,000) 21,000 (109,000) (S)260,000 (D) 7,000 3,000 (760,000) (109,000) 68,000 (801,000) 192,000 (D) 7,000 (S)210,000 (I) 44,200 (A)74,600 -0- (A) 7,000 (A)37,400 (A)20,400 3,400 (A) 9,800 (S) 40,000 (E) 1,400 298,000 489,000 239,200 20,400 1,238,600 (S)90,000 (221,600) (50,000) (58,000) (90,000) 108,000 (108,000) (801,000) 430,600 430,600 (1,238,600) 39. (50 Minutes) (A variety of questions and consolidated balances for combination where parent applies equity method) a. Equity accrual (60% × $70,000) .............................................. Excess amortizations (below) ................................................ Equity income (parent uses equity method) .................... $42,000 (5,600) $36,400 Purchase Price Allocation and Excess Amortizations Purchase price ......................................... $400,000 Book value acquired (60% of $470,000 [assets minus liabilities]) .... 282,000 Price in excess of book value ................. $118,000 Excess price assigned to specific ........... Annual Excess accounts based on fair value ................... Life Amortizations Equipment (overvalued) ([$30,000] × 60%) ................................. (18,000) 10 yrs. $(1,800) Buildings ($155,000 × 60%) ................ 93,000 15 yrs. 6,200 Bonds payable ($20,000 × 60%) .......... 12,000 10 yrs. 1,200 Goodwill ................................................... $31,000 indefinite -0Total ..................................................... $5,600 b. No adjustment to the parent's retained earnings is needed because the company is applying the equity method. c. $5,600—see a. d. $28,000—40% of $70,000 reported income figure e. Watson Corporation Consolidated Income Statement For the Year Ended December 31, 2009 Revenues Operating expenses Combined entity net income Noncontrolling interest in Houston income Consolidated net income $920,000 695,600 224,400 28,000 $196,400 Remaining f. Allocations (see a) Equipment Buildings Bonds payable Goodwill (18,000) 93,000 12,000 31,000 Excess Amortizations for 4 years (7,200) 24,800 4,800 -0- Allocations 12/31/09 (10,800) 68,200 7,200 31,000 39. (continued) g. Noncontrolling interest, 1/1/08 (40% of book value of $630,000) $252,000 Noncontrolling interest in subsidiary's income (see e) ............ 28,000 Noncontrolling interest in subsidiary's dividends .................... (16,000) (40% × $40,000) Noncontrolling interest in subsidiary, 12/31/09 ........................ $264,000 h. Watson Corporation Consolidated Balance Sheet December 31, 2009 Current assets Equipment (net) Buildings (net) Goodwill Total assets 40. $475,000 Current liabilities 909,200 1,001,200 31,000 $2,416,400 Bonds Payable Noncontrolling interest Common stock Retained earnings Total liabilities and equity $560,000 462,800 264,000 310,000 819,600 $2,416,400 (40 Minutes) (Determine consolidated balances, parent has applied the cost method) Acquisition price ........................................... $1,400,000 Book value acquired (see Schedule 1) ($1,120,000 × 80%) ......................................... 896,000 Cost in excess of book value ....................... $504,000 Excess cost allocated to buildings based on fair value ($80,000 × 80%) ........................ Unpatented technology ($550,000 × 80%) .... Total ......................................................... Annual Excess Life Amortizations 64,000 10 years $6,400 440,000 10 years 44,000 $ -0$50,400 Schedule 1—Book Value of Morning (January 1, 2006) Book value, January 1, 2009 (stockholders' equity accounts) .............. 2008 Increase in book value ......................... 2007 Increase in book value ......................... 2006 Increase in book value ......................... Book value, January 1, 2006 ......................... $1,500,000 $200,000 100,000 80,000 380,000 $1,120,000 Revenues = $1,384,000 (add the two book values) Expenses = $550,400 (add the two book values and then include $50,400 excess amortization expenses for the year as computed above) Noncontrolling interest in subsidiary's net income = $80,000 (20% of subsidiary's reported income of $400,000) 40. (continued) Net Income = $753,600 (consolidated revenues less both consolidated expenses and the noncontrolling interest's share of net income) Retained earnings, 1/1/09 = $1,952,800 (the cost method is in use because the original purchase price is still in the Investment account. Thus, the $380,000 increase in book value for the three previous years [income of $680,000 less dividends paid of $300,000] multiplied by the 80 percent ownership gives an equity accrual of $304,000. Excess amortization for these same three years totals $151,200 ($50,400× 3). Therefore, the parent's retained earnings must be increased by the net amount [$152,800 or $304,000 – $151,200]) Dividends paid = $380,000 (the parent company balance only) Retained earnings, 12/31/09 = $2,326,400 (beginning balance plus net income less dividends paid) Cash = $500,000 (add book values) Receivables = $1,000,000 (add book values after removing $100,000 intercompany balance) Inventory = $900,000 (add book values) Investment in Morning = -0- (balance is removed so that subsidiary's assets and liabilities can be included in the consolidated figures) Land = $1,300,000 (add book values) Buildings = $1,038,400 (add book values plus $64,000 allocation less four years of $6,400 annual excess amortization) Unpatented technology = $264,000 ($440,000 original allocation less four years of $44,000 annual amortization) Total assets = $5,002,400 Liabilities = $720,000 (add book values after removing $100,000 intercompany balance) Noncontrolling Interest in subsidiary, 12/31/09 = $356,000 (20% of subsidiary's beginning book value [$1,500,000] plus interest in subsidiary income [$80,000 as computed above] less 20% of subsidiary's dividends [$120,000]) Common stock = $1,000,000 (parent company balance) Additional paid-in capital = $600,000 (parent company balance) Retained earnings, 12/31/09 = $2,326,400 (computed above) Total liabilities and equities = $5,002,400 40. (continued) Consolidated figures can also be determined through a worksheet as follows: Consolidation Entries Entry *C Investment in Morning ........................................ Retained Earnings, 1/1/09 Good ................... 152,800 152,800 (To recognize Good's share of Morning's increase in book value during the 2006-2008 period as well as the amortization expense for that same period. Because the original $1,400,000 is still the balance in the investment in Morning account, the parent is applying the cost method. Thus, 80% of Morning's $380,000 increase in book value [$304,000] must be accrued. Excess amortizations of $151,200 [$50,400 per year for these three years] is also recorded leaving a net adjustment of $152,800.) Entry S Common Stock (Morning) .................................. 460,000 Additional Paid-in Capital (Morning) ................. 40,000 Retained Earnings, 1/1/09 (Morning) ................. 1,000,000 Investment in Morning (80%) ........................ Noncontrolling Interest in Morning (20%) .... 1,200,000 300,000 (To eliminate subsidiary's stockholders' equity accounts while recording the January 1, 2009 balance of the noncontrolling interest.) Entry A Buildings .............................................................. Unpatented technology ...................................... Investment in Morning .................................. 44,800 308,000 352,800 (To recognize unamortized amounts paid in connection with acquisition of Morning. Original allocations have undergone three previous years of excess amortizations.) Entry I Dividend Income ................................................. Dividends Paid ............................................... 96,000 96,000 (To eliminate intercompany income accounts.) Entry E Operating Expenses ........................................... Buildings ........................................................ Unpatented technology .................................. 50,400 6,400 44,000 (To recognize amortization expenses for current year.) Entry P Liabilities ............................................................. Receivables .................................................... (To eliminate intercompany debt.) 100,000 100,000 40. (continued) Accounts Revenues Operating Expenses Dividend Income NCI in Morning's income (20% × 400,000) Net Income Retained earnings, 1/1 Good Morning Net income (above) Dividends paid Retained earnings, 12/31 GOOD AND MORNING Consolidation Worksheet For Year Ending December 31, 2009 Good (884,000) 400,000 (96,000) -0(580,000) (1,800,000) (580,000) 380,000 (2,000,000) Morning (500,000) 100,000 (E) -0- (I) -0(400,000) Consolidation Entries Debit Credit 50,400 96,000 (*C) 152,800 (1,000,000) (S)1,000,000 (400,000) 120,000 (I) 96,000 (1,280,000) Cash Receivables Inventory Investment in Morning 300,000 700,000 400,000 1,400,000 Land Buildings Unpatented Technology Total assets 700,000 300,000 -03,800,000 200,000 400,000 (P) 100,000 500,000 -0- (*C) 152,800 (S)1,200,000 (A) 352,800 600,000 700,000 (A) 44,800 (E) 6,400 -0- (A) 308,000 (E) 44,000 2,400,000 (200,000) (1,000,000) (600,000) (2,000,000) -0-0(3,800,000) (620,000) (P) 100,000 (460,000) (S) 460,000 (40,000) (S) 40,000 (1,280,000) -0(S) 300,000 -0(2,400,000) Liabilities Common stock Additional paid-in capital Retained earnings, 12/31 (above) NCI in Morning, 1/1 NCI in Morning, 12/31 Total liabilities and stockholders' equity Noncontrolling Consolidated Interest Totals (80,000) 24,000 (1,384,000) 550,400 -080,000 (753,600) (1,952,800) -0(753,600) 380,000 (2,326,400) 500,000 1,000,000 900,000 -01,300,000 1,038,400 264,000 5,002,400 (720,000) (1,000,000) (600,000) (2,326,400) (300,000) (356,000) (356,000) (5,002,400)