Chapter 7, Problem 7.2.4P

To determine

Business combination:

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

Consolidated financial statements:

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

Value analysis:

Value analysis in a business combination is an essential part of determining the worth of the acquired entity. This type of analysis helps compute goodwill or gain on acquisition. If the net worth of the acquired entity is less than the consideration paid, then it results in goodwill, and if the net worth of the acquired entity is more than the consideration paid, then it results in gains on the acquisition.

:

Prepare the consolidated worksheet for the year ended December 31, 2016.

Explanation of Solution

Prepare the consolidated worksheet for Company P and Company S for the year ended December 31, 2016:

Company J and Company C
Consolidation Worksheet
Year ending December 31, 2015
	Trial Balance		Adjustments
Balance Sheet	Company J	Company C	Debit	Credit	Income	NCI	Retained earnings	Consolidated Balances
Inventory	$100,000	$50,000		$3,000				$147,000
Other Current assets	$126,000	$180,000						$306,000
Investment in Company C	$413,000			$75,000
			$27,000
				$312,000
				$53,000
Land	$50,000	$50,000						$100,000
Building and Equipment	$350,000	$320,000	$20,000					$690,000
Accumulated Depreciation	($100,000)	($60,000)		$10,000				($170,000)
Goodwill			$30,000					$30,000
Other Intangible assets	$20,000							$20,000
Current liabilities	($120,000)	($40,000)						($160,000)
Bonds payable		($100,000)						($100,000)
Other long-term liabilities	($200,000)							($200,000)
Common stock (Company J)	($200,000)							($200,000)
Paid-in capital in excess of par (Company J)	($100,000)							($100,000)
Retained earnings (Company J)	($214,000)		$3,500					$0
			$15,333				($195,167)
Common stock (Company C)		($50,000)	$45,000			($5,000)
Paid-in capital in excess of par (Company C)		($100,000)	$90,000			($10,000)
Retained earnings (Company C)		($190,000)	$171,000			($29,833)
				$15,000
			$1,500
			$2,667
Sales	($520,000)	($450,000)	$50,000		($920,000)
Cost of goods sold	$300,000	$260,000	$3,000	$50,000	$513,000
Operating expenses	$120,000	$100,000	$5,000		$225,000
Income of subsidiary	($75,000)		$75,000
Dividend income for Company C	$50,000	$30,000	$6,000	$27,000		$3,000	$50,000
Purchased income			$6,000		$6,000
	$0	$0	$545,000	$545,000
Consolidated net income					($176,000)			$0
NCI					$8,200	($8,200)
Controlling interest					($167,800)		($167,800)
Total NCI						($50,033)		($50,033)
Retained earnings of Controlling Interest							($312,967)	$312,967

Table: (1)

Working note 1:

Prepare the determination and distribution of excess schedule:

Value analysis schedule	Company-Implied fair value	Parent price (70%)	Non-controlling interest value (30%)
Fair value of subsidiary	$350,000	$245,000	$105,000
Fair value of net assets excluding goodwill	$300,000	$210,000	$90,000
Goodwill	$50,000	$35,000	$15,000
Determination and distribution of excess schedule
Particulars	Company Implied fair value	Parent price (70%)	Non-controlling interest value (30%)
Fair value of subsidiary (a)	$350,000	$245,000	105000
Book value of interest acquired:
Common stock	$50,000
Paid-in capital in excess of par	$100,000
Retained earnings	$150,000
Total equity	$300,000
Interest acquired		70%	30%
Book value (b)	$300,000	$210,000	$90,000
Excess of fair value over book value [c] = (a) - (b)	$50,000	$35,000	$15,000

Table: (2)

The analysis would be performed by first calculating the amount of debit to retained earnings of the parent company.

Particulars	Amount	Amount
Consideration paid		$ 92,000
Less: Interest acquired
Common stock	$ 50,000
Paid-in-capital in excess of par	$ 100,000
Retained earnings	$ 190,000
Net income (4 months)	$ 30,000
Total stockholders' equity	$ 370,000
Interest acquired	20%	$ 74,000
Excess amount		$ 18,000
Adjustments:
Equipment $\left(\$20,000-\left(\$5,000\times \frac{4}{3}\right)\right)\times 20\%$		$ 2,667
Debit to retained earnings of parent company		$ 15,333

Table: (3)

Working note 3:

Compute the balance which will be appearing in the Investment in Company C in the subsidiary income as on December 31, 2016:

Particulars	Amount	Amount
Cost of the investment in Company C	$ 245,000
Add: Income of Company C in 2015 $\left(\$60,000\times 70\%\right)$	$ 42,000	$ 287,000
Investment Purchased as on May 1, 2016	$ 92,000
Add: Income of Company C in 2016 $\left(\left(\$60,000\times 90\%\right)+\left(\$30,000\times 70\%\right)\right)$	$ 75,000	$ 167,000
Less: Dividend for 2015 $\left(\$20,000\times 70\%\right)$	$ (14,000)
Dividend for 2016 $\left(\$30,000\times 90\%\right)$	$ (27,000)	$ (41,000)
Investment as on December 31, 2016		$ 413,000

Table: (4)