Chapter 4, Problem 30P

a.

To determine

Compute the amount of goodwill recognized in Company H’s acquisition of Company Z and the allocation of goodwill to the controlling and non-controlling interest.

Explanation of Solution

Computation of amount of goodwill recognized in Company H’s acquisition of Company Z and the allocation of goodwill to the controlling and non-controlling interest:

Particulars		Amount
Consideration transferred by Company H		$ 480,000
Fair value of non-controlling interest		$ 260,000
Total fair value of Company Z on January 1, 2017		$ 740,000
Book value of Company Z on January 1, 2017		$ 260,000
Excess fair value over book value		$ 480,000
Allocation to equipment (5 years)	$    55,000
Allocation to patent (10 years)	$  285,000	$ 340,000
Goodwill		$ 140,000

Table: (1)

Allocation of goodwill	Controlling interest	Non-controlling interest
Fair value on date of acquisition	$  480,000	$ 260,000
Share in net assets (60% and 40%)	$  360,000	$ 240,000
Goodwill allocation	$  120,000	$   20,000

Table: (2)

Working note:

Identifiable net assets on acquisition date	$    14,000
Current assets	$  323,000
Property, plant and equipment	$  475,000
Liabilities	$(212,000)
Total fair value of net identifiable assets	$  600,000

Table: (3)

b.

To determine

Show how Company H determined its December 31, 2018, Investment in Company Z account balance.

Explanation of Solution

Investment in Company Z account balance on December 31, 2018:

Particulars	Amount
Initial value	$  480,000
Change in retained earnings	$    81,900
Excess amortization amount in 2017	$  (23,700)
Investment in Company Z on 12/31/2017	$  538,200
Equity income in 2018	$    42,300
Dividends in 2018	$  (18,000)
Investment in Company Z on 12/31/2018	$  562,500

Table: (4)

Working note:

Equity in Company Z earnings:
Net income of Company Z	$  110,000
Excess amortization	$  (39,500)
Adjusted net income	$    70,500
Share of Company H	60%
Equity income in 2018	$    42,300

Table: (5)

c.

To determine

Prepare a worksheet to determine the amounts that should appear on Company H’s December 31, 2018, consolidated financial statements.

Explanation of Solution

Worksheet to determine the amounts that should appear on Company H’s December 31, 2018, consolidated financial statements:

Income statement	Company H	Company Z	Debit	Credit	Non-controlling interest	Consolidated Balances
Revenues	$     (640,500)	$     (428,500)				$ (1,069,000)
Cost of goods sold	$      325,000	$       200,000				$      525,000
Depreciation expense	$        80,000	$         34,000	E11,000			$      125,000
Amortization expense	$        14,000	$         21,000	E 28,500			$        63,500
Other operating expenses	$        52,000	$         63,500				$      115,500
Equity in income of Company Z	$       (42,300)		I 42,300			$                 -
Net income	$     (211,800)	$     (110,000)
Consolidated net income						$    (240,000)
Share of non-controlling interest in net income					$(28,200)	$        28,200
Share of controlling interest in net income						$    (211,800)
Balance Sheet
Current assets	$      125,000	$         81,500				$      206,500
Investment in Company S	$      562,500	$                  -	D 18,000	$  237,900
				$  180,300		$                 -
				$  120,000
				$    42,300
Property, plant and equipment	$      837,000	$       259,000	$      44,000	E11,000		$   1,129,000
Patents	$      149,000	$       147,500	A 256,500	E 28,500		$      524,500
Goodwill	$                  -	$                  -	A 140,000			$      140,000
Total assets	$   1,673,500	$       488,000				$   2,000,000
Liabilities	$     (371,500)	$       (11,500)				$    (383,000)
Common stock	$     (320,000)	$     (100,000)	$    100,000			$    (320,000)
Non-controlling interest opening			$    158,600
			$    120,200
Non-controlling interest closing			$      20,000	$(298,800)		$    (315,000)
Retained earnings	$     (982,000)	$     (376,500)				$    (982,000)
Total liabilities and equity	$  (1,673,500)	$     (488,000)	$    936,800	$  936,800		$   2,000,000

Table: (6)

Working note:

Statement of retained earnings	Company H	Company Z	Debit	Credit	Non-controlling interest	Consolidated Balances
Retained earnings on 01/01	$     (820,200)	$     (296,500)	$    296,500			$    (820,200)
Net Income	$     (211,800)	$     (110,000)				$    (211,800)
Dividends declared	$        50,000	$         30,000		D 18,000	D 12,000	$        50,000
Retained earnings on 31/12	$     (982,000)	$     (376,500)				$    (982,000)

Table: (7)

Computation of consolidated net income allocated to non-controlling interest:

Particulars	Amount
Net income of Company Z	$      110,000
Excess depreciation	$       (11,000)
Excess amortization	$       (28,500)
Adjusted net income	$        70,500
Percentage of non-controlling interest	40%
Net income allocated to non-controlling interest	$        28,200

Table: (8)