Chapter 3, Problem 28P

a.

To determine

Identify how Company P computed the $210,000 Income of Company O balance. Discuss how the accounting method is determined which Company P uses for its investment in Company O.

Explanation of Solution

Computation of Income of Company O balance:

Particulars	Amount
Fair value of Company S on date of acquisition	$        550,000
Book value of assets and liabilities	$        350,000
Excess fair value over book value	$        200,000
		Remaining life	Annual amortization
Equipment	$        30,000	10 years	$     (3,000)
Customer relationships	$        75,000	5 years	$     15,000
Trademark	$      100,000	Indefinite	$               -
Goodwill	$        55,000	Indefinite	$                -
Total	$      200,000		$     12,000

Table: (1)

b.

To determine

Determine and explain the totals to be reported for this business combination for the year ending December 31.

Explanation of Solution

• Revenues: $1,645,000 which includes total of both companies.
• Cost of goods sold: $528,000 which includes total of both companies.
• Amortization expense: $40,000 and amortization of $15,000 has been recorded.
• Depreciation expense: $142,000 which is after adjusting the depreciation of $3,000.
• Income of Company O: $0 which is after removing parent’s income.
• Net income: $935,000 which is after deducting expenses from the revenue.
• Retained earnings on 01/01: $700,000 whre the retained earnings of only parent are included.
• Dividends paid: $142,000 where the dividend of only parent has been taken into account.
• Retained earnings on 12/31: $1,493,000 which is after additing net income and reducing dividends.
• Cash: $290,000 where the cash balance of both companies is added.
• Receivables: $281,000 which includes total of both companies.
• Inventory: $310,000 which includes total of both companies.
• Investment in Company O: $0 where the balance of the parent company is removed.
• Trademarks: $634,000 where the fair value of $100,000 has also been allocated.
• Customer relationships: $60,000 which is after deducting $15,000 from $75,000.
• Equipment: $1,170,000 which is after allocating fair value of $30,000.
• Goodwill: $55,000 which is after the allocation.
• Total assets: $2,800,000 which is sum of all the assets.
• Liabilities: $907,000 which includes total of both companies.
• Common stock: $400,000 which includes balance of the parent only.
• Retained earnings on 12/31: $1,493,000 which the amount is after computation from opening retained earnings and net income.
• Total liabilities and equities: $2,800,000 which is sum total of all liabilities and equity.

c.

To determine

Prepare a worksheet to determine the consolidated values to be reported on Company P’s financial statements.

Explanation of Solution

Worksheet to determine the consolidated values to be reported on Company P’s financial statements:

Income statement	Company P	Company O	Debit	Credit	Consolidated Balances
Revenues	$(1,125,000)	$ (520,000)			$(1,645,000)
Cost of goods sold	$300,000	$   228,000			$ 528,000
Depreciation expense	$   75,000	$    70,000		E 3,000	$ 142,000
Amortization expense	$  25,000		E 15,000		$  40,000
Equity earnings from Company M	$(210,000)		I 210,000		$                    -
Net income	$(935,000)	$  (222,000)			$(935,000)
Balance Sheet
Cash	$ 185,000	$   105,000			$ 290,000
Accounts receivable	$ 225,000	$     56,000			$ 281,000
Inventories	$ 175,000	$    135,000			$ 310,000
Investment in Company O	$ 680,000	$                        -	D 80,000	S  $350,000
				A 200,000	$                    -
				I 210,000
Trademark	$ 474,000	$     60,000	A 100,000		$ 634,000
Customer relationships	$        0		A 75,000	E 15,000	$     60,000
Equipment	$ 975,000	$      272,000	E 3,000	A 30,000	$1,170,000
Goodwill	$       0	$                        -	A 55,000		$  55,000
Total assets	$2,664,000	$    628,000			$2,800,000
Liabilities	$(771,000)	$(136,000)			$(907,000)
Common stock	$(400,000)	$ (100,000)	S $100,000		$(400,000)
Retained earnings	$(1,493,000)	$ (392,000)			$(1,493,000)
Total liabilities and equity	$(2,664,000)	$ (628,000)	$888,000	$888,000	$(2,800,000)

Table: (2)

Working note:

Statement of retained earnings	Company P	Company O	Debit	Credit	Consolidated Balances
Retained earnings on 01/01	$(700,000)	$ 250,000	$250,000		$(700,000)
Net Income	$(935,000)	$ (222,000)			$(935,000)
Dividends declared	$       142,000	$              80,000		D 80000	$        142,000
Retained earnings on 31/12	$(1,493,000)	$ (392,000)			$(1,493,000)

Table: (3)