Following are the individual financial statements for Gibson and Davis for the year ending December 31, 2021: Gibson Davis Sales $ (774,000 ) $ (359,000 ) Cost of goods sold 351,000 167,000 Operating expenses 197,000 80,000 Dividend income (18,000 ) 0 Net income $ (244,000 ) $ (112,000 ) Retained earnings, 1/1/21 $ (746,000 ) $ (416,000 ) Net income (244,000 ) (112,000 ) Dividends declared 60,000 30,000 Retained earnings, 12/31/21 $ (930,000 ) $ (498,000 ) Cash and receivables $ 314,400 $ 80,000 Inventory 505,000 168,000 Investment in Davis 576,600 0 Buildings (net) 551,000 592,000 Equipment (net) 453,000 499,000 Total assets $ 2,400,000 $ 1,339,000 Liabilities $ (840,000 ) $ (501,000 ) Common stock (630,000 ) (340,000 ) Retained earnings, 12/31/21 (930,000 ) (498,000 ) Total liabilities and stockholders' equity $ (2,400,000 ) $ (1,339,000 ) Gibson acquired 60 percent of Davis on April 1, 2021, for $576,600. On that date, equipment owned by Davis (with a five-year remaining life) was overvalued by $33,000. Also on that date, the fair value of the 40 percent noncontrolling interest was $384,400. Davis earned income evenly during the year but declared the $40,000 dividend on November 1, 2021. Prepare a consolidated income statement for the year ending December 31, 2021. Determine the consolidated balance for each of the following accounts as of December 31, 2021: Goodwill Equipment (net) Common stock Buildings (net) Dividends declared
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Following are the individual financial statements for Gibson and Davis for the year ending December 31, 2021:
| Gibson | Davis | ||||||
| Sales | $ | (774,000 | ) | $ | (359,000 | ) | |
| Cost of goods sold | 351,000 | 167,000 | |||||
| Operating expenses | 197,000 | 80,000 | |||||
| Dividend income | (18,000 | ) | 0 | ||||
| Net income | $ | (244,000 | ) | $ | (112,000 | ) | |
| $ | (746,000 | ) | $ | (416,000 | ) | ||
| Net income | (244,000 | ) | (112,000 | ) | |||
| Dividends declared | 60,000 | 30,000 | |||||
| Retained earnings, 12/31/21 | $ | (930,000 | ) | $ | (498,000 | ) | |
| Cash and receivables | $ | 314,400 | $ | 80,000 | |||
| Inventory | 505,000 | 168,000 | |||||
| Investment in Davis | 576,600 | 0 | |||||
| Buildings (net) | 551,000 | 592,000 | |||||
| Equipment (net) | 453,000 | 499,000 | |||||
| Total assets | $ | 2,400,000 | $ | 1,339,000 | |||
| Liabilities | $ | (840,000 | ) | $ | (501,000 | ) | |
| Common stock | (630,000 | ) | (340,000 | ) | |||
| Retained earnings, 12/31/21 | (930,000 | ) | (498,000 | ) | |||
| Total liabilities and |
$ | (2,400,000 | ) | $ | (1,339,000 | ) | |
Gibson acquired 60 percent of Davis on April 1, 2021, for $576,600. On that date, equipment owned by Davis (with a five-year remaining life) was overvalued by $33,000. Also on that date, the fair value of the 40 percent noncontrolling interest was $384,400. Davis earned income evenly during the year but declared the $40,000 dividend on November 1, 2021.
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Prepare a consolidated income statement for the year ending December 31, 2021.
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Determine the consolidated balance for each of the following accounts as of December 31, 2021:
Goodwill - Equipment (net)
- Common stock
- Buildings (net)
- Dividends declared
Solution:
Introduction:
Acquisition of a business means obtaining ownership in shares from transferor(s) in all or some of their operating units to gain control over the transferor company in exchange for any cash consideration or other.
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