Chapter 2, Problem 2.14.2P

To determine

Business combination:

Business combination refers tothe combining of one or more business organizations in a single entity. The business combination leads to the formation of combined financial statements. After business combination, the entities having separate control merges into one having control over all the assets and liabilities. Merging and acquisition are types of business combinations.

Consolidated financial statements:

The consolidated financial statements refer to the combined financial statements of the entities which are prepared at the year-end. The consolidated financial statements are prepared when one organization is either acquired by the other entity or two organizations merged to form the new entity.The consolidated financial statements serve the purpose of both the entities about financial information.

To Prepare:

Consolidated worksheet as of December 31, 2015.

Answer to Problem 2.14.2P

Company P and Company S
Consolidation Worksheet
Year ending December 31, 2015
Balance Sheet	Company P	Company S	Debit	Credit	NCI	Consolidated Balances
Cash	$20,000					$20,000
Accounts receivable	$300,000	$50,000				$350,000
Inventory	$410,000	$120,000		$20,000		$510,000
Investment in Company P	$950,000			$272,000
				$678,000
Land	$800,000	$100,000	$100,000			$1,000,000
Building	$2,800,000	$300,000	$200,000			$3,300,000
Accumulated depreciation	($500,000)	($100,000)				($600,000)
Equipment	$600,000	$140,000	$110,000			$850,000
Accumulated depreciation	($230,000)	($50,000)				($280,000)
Patents		$10,000	$140,000			$150,000
Computer software			$50,000			$50,000
Goodwill		$60,000	$277,500			$337,500
Current liabilities	($150,000)	($90,000)				($240,000)
Bonds payable	($300,000)	($200,000)				($500,000)
Premium on Bonds payable				$10,000		($10,000)
Common stock (Company S)		($10,000)	$8,000		($2,000)	$0
Paid-in capital in excess of par (Company S)		($190,000)	$152,000		($38,000)	$0
Retained earnings (Company S)		($140,000)	$112,000	$169,500	($197,500)	$0
Common stock (Company P)	($92,000)					($92,000)
Paid-in capital in excess of par (Company P)	($3,508,000)					($3,508,000)
Retained earnings (Company P)	($1,100,000)					($1,100,000)
Non-controlling interest						$0
Totals	$0	$0	$1,149,500	$1,149,500	$237,500	$237,500

Table: (1)

Explanation of Solution

Company P and Company S
Consolidation Worksheet
Year ending December 31, 2015
Balance Sheet	Company P	Company S	Debit	Credit	NCI	Consolidated Balances
Cash	$20,000					$20,000
Accounts receivable	$300,000	$50,000				$350,000
Inventory	$410,000	$120,000		$20,000		$510,000
Investment in Company P	$950,000			$272,000
				$678,000
Land	$800,000	$100,000	$100,000			$1,000,000
Building	$2,800,000	$300,000	$200,000			$3,300,000
Accumulated depreciation	($500,000)	($100,000)				($600,000)
Equipment	$600,000	$140,000	$110,000			$850,000
Accumulated depreciation	($230,000)	($50,000)				($280,000)
Patents		$10,000	$140,000			$150,000
Computer software			$50,000			$50,000
Goodwill		$60,000	$277,500			$337,500
Current liabilities	($150,000)	($90,000)				($240,000)
Bonds payable	($300,000)	($200,000)				($500,000)
Premium on Bonds payable				$10,000		($10,000)
Common stock (Company S)		($10,000)	$8,000		($2,000)	$0
Paid-in capital in excess of par (Company S)		($190,000)	$152,000		($38,000)	$0
Retained earnings (Company S)		($140,000)	$112,000	$169,500	($197,500)	$0
Common stock (Company P)	($92,000)					($92,000)
Paid-in capital in excess of par (Company P)	($3,508,000)					($3,508,000)
Retained earnings (Company P)	($1,100,000)					($1,100,000)
Non-controlling interest						$0
Totals	$0	$0	$1,149,500	$1,149,500	$237,500	$237,500

Table: (1)

Working note 1:

Value Analysis schedule:

Value analysis schedule	Company-Implied fair value	Parent price (80%)	Non-controlling interest value (20%)
Fair value of subsidiary	$1,187,500	$950,000	$237,500
Fair value of net assets excluding goodwill	$850,000	$680,000	$170,000
Gain on acquisition	$337,500	$270,000	$67,500

Table: (2)

Working note 2:

Determination and distribution of excess schedule:

Determination and distribution of excess schedule
Particulars	Company Implied fair value	Parent price (80%)	Non-controlling interest value (20%)
Fair value of subsidiary (a)	$1,187,500(5)	$950,000	$237,500
Book value of interest acquired
Common stock	$10,000
Paid-in capital in excess of par	$190,000
Retained earnings	$140,000
Total equity	$340,000	$340,000	$340,000
Interest acquired		80%	20%
Book value (b)	$340,000	$272,000	$68,000
Excess of fair value over book value [c] = (a) - (b)	$847,500	$678,000	$169,500
Adjustment of identifiable accounts	Adjustment	Life	Amortization per year	Worksheet key
Increase in inventory value	($20,000)			Debit (D) 1
Increase in land value	$100,000			Debit (D) 2
Increase in building	$200,000			Debit (D) 3
Increase in equipment	$110,000			Debit (D) 4
Increase in patents	$140,000			Debit (D) 5
Increase in computer software	$50,000			Debit (D) 6
Premium on bonds payable	($10,000)			Credit (D) 7
Goodwill	$277,500			Credit (D) 8
Total	$847,500

Table: (3)

Working note 3:

Compute the fair value of the net assets of Company S:

Particulars	Amount
Total assets:
Accounts receivable	$50,000
Inventory	$100,000
Land	$200,000
Building	$400,000
Equipment	$200,000
Patent	$150,000
Computer software	$50,000
Total liabilities:
Current liabilities	($90,000)
Bonds payable	($210,000)
Total fair value of net assets of Company S	$850,000

Table: (4)

Working note 4:

Compute the amount of consideration:

  $\begin{array}{c}Amountofconsidertaion=\$19,000\times \$50\\ =\$950,000\end{array}$

Working note 5:

Compute the fair value of subsidiary:

  $\begin{array}{c}Amountofconsidertaion=\frac{\$950,000}{80\%}\\ =\$1,187,500\end{array}$