Chapter 3, Problem 3.11.2P

To determine

Introduction:

Consolidation of statements:

The result of parent as well as all of its subsidiaries financial position is reflected in consolidated statements. It is beneficial for creditors and owners of the parent company to know the outcome of the operations of parent and its subsidiaries.

To calculate: Consolidated worksheet for paulcraft corporation and its subsidiary Switzer corporation as of Dec 31 2017. Also preparing supporting amortization and income distribution schedules.

Answer to Problem 3.11.2P

The Fair value of subsidiary is $550000 parent price of $440000 and non-controlling interest value comes to $110000. The fair value of net assets excluding goodwill comes to $464000 which is arrived by considering Inventory, lands, bonds payable, buildings and equipment and total equity. Goodwill is calculated and is arrived at $86000 after taking the difference of fair value of subsidiary and fair value of net assets which is goodwill.

Explanation of Solution

1. Worksheet Paulcraft Corporation and Subsidiary Switzer Company.

Particular	Trial Balance		Eliminations & Adjustments		Con Inc.stmt	NCI	Controlling interest RE	Con BS
	Company P	Company S	Debit	Credit
Cash	$138000	$110000						$248000
Accounts receivable	$90000	$55000						$145000
Inventory	$120000	$86000						$206000
Land	$100000	$60000	$90000 (4)					$250000
Investment in S	$480000		)	$28000(1)
			$8000(2)
				$225600(3)
				$270400(4)
Buildings	$800000	$250000	$130000(4)					$1180000
Acc depre	($220000)	($80000)		$19500 (5)				($319500)
Equipment	$150000	$100000	$30000 (4)					$280000
Acc depre	($90000)	($72000)		$18000 (5)				($180000)
Goodwill			$86000(4)					$86000
Current liabilities	($60000)	($102000)						($162000)
Bond payable		($100000)						($100000)
Discount (premium)			$4000 (4)
				$2400 (5)				$1600
Common stock- S		($10000)	$8000 (3)			($2000)
Paid in cap in excess of Par − S		($90000)	$72000 (3)			($18000)
RE- S		($182000)	$145600 (3)			($99080)
			$5320(5)	$67600(4)
				$400 (4)
Common stock − P	($100000)							($100000)
Paid in cap in excess of Par − P	($900000)							($900000)
RE- P	($371000)
				$1600 (4)
			$21280(5)				($351320)
Sales	($800000)	($350000)			($1150000)
COGS	$450000	$210000			$660000
Depe exp- Bldg	$30000	$15000	$6500 (5)		$51500
Depre exp- equipment	$15000	$14000	$6000 (5)		$35000
Other expenses	$140000	$68000			$208000
Interest exp		$8000	$800 (5)		$8800
Sub (dividend) Income	($28000)		$28000 (1)
Div declared − S		$10000		$8000 (2)		$2000
Div declared- P	$20000						$20000
Total			$641500	$641500
Cons Net income					($186700)
To NCI (#6)					$4340	($4340)
To CI					$182360		($182360)
Total NCI						($121420)		($121420)
RE CI							($513680)	($513680)

2. Determination of Value analysis schedule:-

Particulars	Company Implied Value	Parent (80%)	NCI (20%)
Fair Value of Company	$550000 ( working #1)	$440000	$110000
Fair value of net assets excluding goodwill	$464000 (Working #2)	$371200	$92800
Goodwill	$86000	$68800	$17200

3. Determination and Distribution of Excess schedule

Particulars	Company Implied Fair value	Parent (100%)		NCI (0%)
Fair value of subsidiary (A)	$550000	$440000		$110000
Book Value of Interest acquired
Common stock	$10000
Paid in capital in excess of par	$90000
Retained Earnings	$112000
Total Equity	$212000	$212000		$212000
Interest acquired		80%		20%
Book Value (b)	$212000	$169600		$42400
Excess of Fair value over Book Value (a − 212000)	$338000 ($480000-$212000)	$270400		$67600
Adjustment of Identifiable accounts	Adjustment	Life	Amortization per year
Inventory (Working #4)	($2000)			Credit D1
Land(Working #4)	$90000			Debit D2
Bonds Payable(Working #4)	$4000	5 years	$800	Debit D3
Buildings(Working #4)	$130000	20	$6500	Debit D4
Equipment(Working #4)	$30000	5	$6000	Debit D5
Goodwill ( per Value analysis table )	($86000)			Debit D6
Total	$338000

Where Debit D records non-controlling interest portion of excess of fair value over the book value, excess in investment account is distributed and patent is adjusted to fair value.

Working :-

1. Company fair value of subsidiary

P Company purchase outstanding stock of S company for $440000

  $\begin{array}{l}=\frac{\$440000}{80}\times 100\\ =\$550000\end{array}$

2. Fair value of net assets excluding goodwill

= Total Equity +Inventory +land+ Bonds payable+ Buildings+ Equipment

  $\begin{array}{l}=\$212000-\$2000+\$90000+\$4000+\$130000+\$30000\\ =\$464000\end{array}$

3. Goodwill

  $Fairvalueofsubsidiarycompany–Fairvalueofnetassets$

  $=\$550000-\$464000=\$86000$

4. Assets

Assets	Adjustment (a-b)	Cost (a)	Market Value (b)
Inventory	($2000)	40000	38000
Land	$90000	60000	150000
Bonds Payable	$4000	100000	96000
Buildings	$130000	150000 ( $200000-$50000)	280000
Equipment	$30000	70000 ($10000-$30000)	100000

5. Total amortization table

Account adjustments	Life	Annual amount	Current year	Prior year	Total	Key
Inventory	1	($2000)		($2000)	($2000)	D1
Subject to amortization
Bonds payable	5	$800	$800	$1600	$2400	A3
Buildings	20	$6500	$6500	$13000	$19500	A4
Equipment	5	$6000	$6000	$12000	$18000	A5
Total amortizations		$13300	$13300	$26600	$39900

6. Internally generated income - S company Internally generated income = S company sales −[COGS+Depreciation (bldg.)+Depreciation(equipment)+Other expense+Interest expense]

  $\begin{array}{l}=\$350000-[\$210000+\$15000+\$14000+\$68000+\$8000]\\ =\$35000\end{array}$

S company income distribution

Particular	Amount	Particular	Amount
Current year amortizations	$13300	Internally generated income (Working #6)	$35000
		Adjusted income before tax	$21700
		NCI in subsidiary ( $\$21700\times 20\%$	$4340
		Controlling interest share ( $\$21700\times 80\%$ )	$17360

7. Internally generated income - P Company Internally generated income = S company sales −[COGS+Depreciation (bldg.)+Depreciation(equipment)+Other expense]

  $\begin{array}{l}=\$800000-[\$450000+\$30000+\$15000+\$140000]\\ =\$165000\end{array}$

P company income distribution

Particular	Amount	Particular	Amount
Current year amortizations	$13300	Internally generated income (Working #7)	$165000
		Controlling share of subsidiary	$17360
		Controlling interest share	$182360