Chapter 2, Problem 26P

To determine

Find the consolidated balances for the following accounts.

a. Net income

b. Retained earnings, 1/1/17

c. Patented technology

d. Goodwill

e. Liabilities

f. Common stock

g. Additional paid-in capital.

Answer to Problem 26P

	Accounts	Consolidated value
a.	Net income	$        210,000
b.	Retained earnings, 1/1/17	$        800,000
c.	Patented technology	$     1,180,000
d.	Goodwill	$        50,000
e.	Liabilities	$     1,210,000
f.	Common stock	$        510,000
g.	Additional paid-in capital	$        680,000

Table: (1)

Explanation of Solution

The consolidated balances are as follows:

	Accounts	Book values in Company P	Fair values in Company S	Consolidated value
a.	Net income (1)			$        210,000
b.	Retained earnings, 1/1/17	$       800,000		$        800,000
c.	Patented technology	$       900,000	$      280,000	$     1,180,000
d.	Goodwill (2)			$        50,000
e.	Liabilities (3)	$       500,000	$      410,000	$     1,210,000
f.	Common stock (4)			$        510,000
g.	Additional paid-in capital (5)			$        680,000

Table: (2)

Working note:

Computation of net income:

$\begin{array}{c}\text{Net}\text{income}\text{=}\text{Net}\text{income}\text{in}\text{books}\text{of}\text{Company}\text{W}-\text{Broker's}\text{fees}\\ =\$240,000-\$30,000\\ =\$210,000\end{array}$ (1)

Computation of Goodwill:

Particulars	Amount	Amount
Consideration paid $\left(\$300,000\right)+\left(15,000\times \$40\right)$		$ 900,000
Cash	$    110,000
Receivables	$  170,000
Patented Technology (net)	$    280,000
Equipment (net)	$    700,000
Liabilities	$    (410,000)
Fair value of net identifiable assets		$ 850,000
Goodwill		$   80,000 (2)

Table: (3)

Computation of liabilities:

$\begin{array}{c}\text{Liabilities}\text{=}\text{Liabilities}\text{in}\text{the}\text{books}\text{of}\text{Company}\text{W}\text{+}\text{Debt}\text{issued}\\ \text{+}\text{Liabilities}\text{in}\text{the}\text{books}\text{of}\text{Company}\text{B}\\ =\$500,000+\$410,000+\$300,000\\ =\$1,210,000\end{array}$ (3)

Computation of Common Stock:

$\begin{array}{c}\text{Common}\text{stock}\text{=}\text{Common}\text{stock}\text{in}\text{the}\text{books}\text{of}\text{Company}\text{W}\text{+}\text{Stock}\text{issued}\\ \text{=}\text{\$360,000}\text{+}\left(15,000\times \$10\right)\\ =\$510,000\end{array}$ (4)

Computation of Additional paid-in capital:

$\begin{array}{c}\text{Additional paid-in capital}\text{=}\text{Additional paid-in capital}\text{in}\text{the}\text{books}\text{of}\text{Company}\text{W}\\ \text{+}\text{Additional paid-in capital}\text{on}\text{stock}\text{issued}-\text{Stock}\text{issue}\text{costs}\\ \text{=}\text{\$270,000}\text{+}\left(15,000\times \$30\right)-\$40,000\\ =\$680,000\end{array}$ (5)