Chapter 2, Problem 22P

To determine

Determine the value that would be shown in Company P’s consolidated financial statements for each of the accounts listed:

Accounts
Inventory	Revenues
Land	Additional paid-in capital
Buildings and equipment	Expenses
Franchise agreements	Retained earnings, 1/1
Goodwill	Retained earnings, 12/31

Answer to Problem 22P

Accounts	Consolidated value
Inventory	$      670,000
Land	$      710,000
Buildings and equipment	$      930,000
Franchise agreements	$      440,000
Goodwill	$        80,000
Revenues	$      960,000
Additional paid-in capital	$      265,000
Expenses	$      940,000
Retained earnings, 1/1	$      390,000
Retained earnings, 12/31	$      430,000

Explanation of Solution

Value that would be shown in Company P’s consolidated financial statements for each of the accounts listed are as follows:

Accounts	Book values in Company P	Fair values in Company S	Consolidated value
Inventory	$       410,000	$      260,000	$      670,000
Land	$       600,000	$      110,000	$      710,000
Buildings and equipment	$       600,000	$      330,000	$      930,000
Franchise agreements	$       220,000	$      220,000	$      440,000
Goodwill (1)			$        80,000
Revenues (2)			$      960,000
Additional paid-in capital(3)			$      265,000
Expenses			$      940,000
Retained earnings, 1/1 (4)			$      390,000
Retained earnings, 12/31(5)			$      430,000

Working note:

Computation of goodwill:

Particulars	Amount	Amount
Consideration paid $\left(\$360,000\right)+\left(10,000\times \$40\right)$		$ 760,000
Cash	$    120,000
Receivables	$  300,000
Inventory	$    260,000
Land	$    110,000
Building and equipment (net)	$    330,000
Franchise agreements	$    220,000
Accounts payable	$   (120,000)
Accrued expenses	$   (30,000)
Long-term liabilities	$   (510,000)
Fair value of net identifiable assets		$ 680,000
Goodwill		$   80,000 (1)

Computation of revenues:

The value of revenues will be same as it is given for Company P which is $960,000. (2)

Computation of Additional paid-in capital:

$\begin{array}{c}\text{Additional paid-in capital}\text{=}\text{Additional paid-in capital}\text{of}\text{Company}\text{P}\\ \text{+}\text{New}\text{Additional paid-in capital}-\text{Stock}\text{issuing}\text{costs}\\ =\$70,000+\left(10,000\times \$20\right)-\$5,000\\ =\$265,000\left(3\right)\end{array}$

Computation of Retained earnings, 1/1:

The Retained earnings, 1/1 will be same as it is given for Company P which is $390,000. (4)

Computation of Retained earnings, 12/31:

$\begin{array}{c}\text{Retained earnings, 12/31}\text{=}\text{Retained earnings, 1/1}\text{+}\text{Net}\text{Income}\\ \text{=}\text{\$390,000}\text{+}\text{Revenues}-\text{Expenses}\\ =\$390,000+\$960,000-\$920,000\\ =\$430,000\left(5\right)\end{array}$