Answered: Ending Balance Orlginal Cost to…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Fred, Inc., and Herman Corporation formed a business combination on January 1, 2016, when Fred acquired a 60 percent interest in Herman’s common stock for $312,000 in cash. The book value of Herman’s assets and liabilities on that day totaled $300,000 and the fair value of the noncontrolling interest was $208,000. Patents being held by Herman (with a 12-year remaining life) were undervalued by $90,000 within the company’s financial records and a customer list (10-year life) worth $130,000 was also recognized as part of the acquisition-date fair value.

Intra-entity inventory transfers occur regularly between the two companies. Merchandise carried over from one year to the next is always sold in the subsequent period.

Fred had not paid for half of the 2018 inventory transfers by year-end.

On January 1, 2017, Fred sold $15,000 in land to Herman for $22,000. Herman is still holding this land.

On January 1, 2018, Herman acquired $20,000 (face value) of Fred’s bonds in the open market. These bonds had an 8 percent cash interest rate. On the date of repurchase, the liability was shown within Fred’s records at $21,386, indicating an effective yield of 6 percent. Herman’s acquisition price was $18,732 based on an effective interest rate of 10 percent.

Herman indicated earning a net income of $25,000 within its 2018 financial statements. The subsidiary also reported a beginning Retained Earnings balance of $300,000, dividends of $4,000, and common stock of $100,000. Herman has not issued any additional common stock since its takeover. The parent company has applied the equity method to record its investment in Herman.

a. Prepare consolidation worksheet adjustments for 2018.

b. Calculate the amount of consolidated net income attributable to the noncontrolling interest for 2018. In addition, determine the ending 2018 balance for noncontrolling interest in the consolidated balance sheet.

c. Determine the consolidation worksheet adjustments needed in 2019 in connection with the intra-entity bonds.

Ending
Balance
Orlginal
Cost to
Transfer
at Transfer
Price
Price
Year
Herman
to Fred
2016
$100,000
$20,000
$80,000
100,000
2017
125,000
40,000
2018
90,000
120,000
30,000

Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.

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