Chapter 4, Problem 35P

a.

To determine

Determine the consolidated balances for this business combination as of December 31, 2015.

Explanation of Solution

The consolidated balances for this business combination as of December 31, 2015 are as follows:

Income statement	Company P	Company S	Debit	Credit	Non-controlling interest	Consolidated Balances
Revenues	$(1,843,000)	$     (675,000)				$ (2,518,000)
Cost of goods sold	$  1,100,000	$      322,000				$  1,422,000
Depreciation expense	$     125,000	$      120,000				$     245,000
Amortization expense	$     275,000	$        11,000	E 80,000			$     366,000
Interest expense	$       27,500	$          7,000				$       34,500
Equity in income of Company S	$   (121,500)		I 121,500			$                 -
Net income	$   (437,000)	$     (215,000)
Consolidated net income						$    (450,500)
Share of non-controlling interest in net income					$      (13,500)	$       13,500
Share of controlling interest in net income						$    (437,000)
Balance Sheet
Current assets	$  1,204,000	$      430,000				$  1,634,000
Investment in Company S	$  1,854,000	$                  -	D $22,500	S 769500
				A $985,500
				I 121,500		$                 -
Customer base	$                -	$                  -	A 720,000	E 80,000		$     640,000
Building and equipment	$     931,000	$      863,000				$  1,794,000
Copyrights	$     950,000	$      107,000				$  1,057,000
Goodwill		$                  -	A 375,000			$     375,000
Total assets	$  4,939,000	$   1,400,000				$  5,500,000
Accounts payable	$   (485,000)	$     (200,000)				$    (685,000)
Note payable	$   (542,000)	$     (155,000)				$    (697,000)
Non-controlling interest in Company S				S $85,500
				A $109,500	$    (195,000)
					$    (206,000)	$    (206,000)
Common stock	$   (900,000)	$     (400,000)	S 400000			$    (900,000)
Additional paid-in capital	$   (300,000)	$       (60,000)	S 60000			$    (300,000)
Retained earnings on 12/31	$(2,712,000)	$     (585,000)				$ (2,712,000)
Total liabilities and equity	$(4,939,000)	$  (1,400,000)	$2,714,000	$  2,714,000		$  5,500,000

Table: (1)

Working note:

Statement of retained earnings	Company P	Company S	Debit	Credit	Non-controlling interest	Consolidated Balances
Retained earnings on 01/01	$(2,625,000)	$     (395,000)	$   395,000			$ (2,625,000)
Net Income	$   (437,000)	$     (215,000)				$    (437,000)
Dividends declared	$     350,000	$        25,000		D 22,500	D 2,500	$     350,000
Retained earnings on 31/12	$(2,712,000)	$     (585,000)				$ (2,712,000)

Table: (2)

b.

To determine

Identify the changes which would be evident in the consolidated statements if instead the non-controlling interest’s acquisition-date fair value is assessed at $167,500.

Explanation of Solution

The changes which would be evident in the consolidated statements if instead the non-controlling interest’s acquisition-date fair value is assessed at $167,500:

$\begin{array}{c}\text{Changes}\text{in}\text{consolidated}\text{values}=\$206,000-\$178,500\\ =\$27,500\end{array}$

Working note:

Computation of new amount of goodwill:

Particulars	Amount
Fair value of Company S $\left(\$1,710,000+\$167,500\right)$	$  1,877,500
Book value	$   (725,000)
Excess fair value	$  1,152,500
Customer base	$   (800,000)
Goodwill	$     352,500
Original goodwill	$     375,000
Difference	$     22,500

Table: (3)

Thus, the amount of goodwill has decreased by $22,500.

Computation of new balance of Non-controlling interest:

$\begin{array}{c}\text{Non-controlling}\text{interest}\text{=}\text{Fair}\text{value}\text{at}\text{acquisition}\text{date}\\ \text{+}\text{Non-}\text{controlling}\text{interest}\text{in}\text{consolidated}\text{income}-\text{Dividends}\\ =\$167,500+\$13,500-\$2,500\\ =\$178,500\end{array}$