Chapter 4, Problem 38P

a.

To determine

Prepare schedules for acquisition-date fair-value allocations and amortizations for Company A’s investment in Company B.

Explanation of Solution

Schedules for acquisition-date fair-value allocations and amortizations for Company A’s investment in Company B:

Particulars		Amount
Consideration transferred by Company A		$    603,000
Fair value of non-controlling interest		$      67,000
Total fair value of Company B		$    670,000
Book value of Company B		$  (460,000)
Excess fair value over book value		$    210,000
Excess fair value allocated to:		Remaining life	Annual amortization
Land	$   30,000		$               -
Building	$ (20,000)	10 years	$      (2,000)
Equipment	$   40,000	5 years	$       8,000
Patent	$   50,000	10 years	$       5,000
Notes Payable	$   20,000	5 years	$       4,000
Goodwill	$   90,000	indefinite	$               -
Total			$     15,000

Table: (1)

b.

To determine

Determine the method of accounting of Company A’s investment in Company B.

Explanation of Solution

Company A is using the partial equity method for its investment in Company B. Company A is earning income from investment in Company B which is 90% of the earnings of Company B from its assets.

Thus,

$\begin{array}{c}\text{Income}\text{from}\text{investment}=\$120,000\times 90\%\\ =\$108,000\end{array}$

c.

To determine

Determine the balances to be reported as of December 31, 2015, for this business combination.

Explanation of Solution

The balances to be reported as of December 31, 2015, for this business combination:

Income statement	Company A	Company B	Consolidated Balances
Revenues	($940,000)	($280,000)	($1,220,000)
Cost of goods sold	$480,000	$90,000	$570,000
Depreciation expense	$100,000	$55,000	$161,000
Amortization expense	$0		$5,000
Interest expense	$40,000	$15,000	$59,000
Equity in income of Company B	($108,000)		$0
Net income	($428,000)	($120,000)
Consolidated net income			($425,000)
Share of non-controlling interest in net income			$10,500
Share of controlling interest in net income			($414,500)
Balance Sheet
Current assets	$610,000	$250,000	$860,000
Equipment	$873,000	$150,000	$1,047,000
Investment in Company B	$702,000	$0	$0
Building	$490,000	$250,000	$724,000
Patents	$0		$40,000
Land	$380,000	$150,000	$560,000
Goodwill		$0	$90,000
Total assets	$3,055,000	$800,000	$3,321,000
Notes payable	($860,000)	($230,000)	($1,078,000)
Common stock	($510,000)	($180,000)	($510,000)
Retained earnings on 12/31	($1,685,000)	($390,000)	($1,658,000)
Non-controlling interest in Company S			($75,000)
Total liabilities and equity	($3,055,000)	($800,000)	($3,321,000)

Table: (2)

Working note:

Statement of retained earnings	Company A	Company B	Consolidated Balances
Retained earnings on 01/01	$    (1,367,000)	$     (340,000)	$     (1,353,500)
Net Income	$       (428,000)	$     (120,000)	$        (414,500)
Dividends declared	$        110,000	$         70,000	$          110,000
Retained earnings on 31/12	$    (1,685,000)	$     (390,000)	$     (1,658,000)

Table: (3)

Computation of the amount to be allocated to investments:

$\begin{array}{c}\text{Amount}\text{of}\text{investment}=\left(\$180,000+\$340,000\right)\times 90\%\\ =\$468,000\end{array}$

Computation of the amount to be allocated to non-controlling interest:

$\begin{array}{c}\text{Amount}\text{of}\text{non-controlling interest}=\left(\$180,000+\$340,000\right)\times 10\%\\ =\$52,000\end{array}$

d.

To determine

Prepare a consolidation worksheet for Company A and Company B, as of December 31, 2015.

Explanation of Solution

The consolidation worksheet for Company A and Company B, as of December 31, 2015:

Income statement	Company A	Company B	Debit	Credit	Non-controlling interest	Consolidated Balances
Revenues	($940,000)	($280,000)				($1,220,000)
Cost of goods sold	$480,000	$90,000				$570,000
Depreciation expense	$100,000	$55,000				$161,000
Amortization expense	$0		E 80,000			$5,000
Interest expense	$40,000	$15,000				$59,000
Equity in income of Company B	($108,000)		I 121,500			$0
Net income	($428,000)	($120,000)
Consolidated net income						($425,000)
Share of non-controlling interest in net income					($13,500)	$10,500
Share of controlling interest in net income						($414,500)
Balance Sheet
Current assets	$610,000	$250,000				$860,000
Equipment	$873,000	$150,000	D $32,000	S 8,000		$1,047,000
Investment in Company B	$702,000	$0	$63,000	A $13,500		$0
				$468,000
				$175,500
				$108,000
Building	$490,000	$250,000	$2,000	I 18,000		$724,000
Patents	$0			E 10,000		$40,000
Land	$380,000	$150,000	$30,000			$560,000
Goodwill		$0	$90,000			$90,000
Total assets	$3,055,000	$800,000				$3,321,000
Notes payable	($860,000)	($230,000)	$16,000	$4,000		($1,078,000)
Common stock	($510,000)	($180,000)	$180,000			($510,000)
Retained earnings on 12/31	($1,685,000)	($390,000)		$52,000		($1,658,000)
Non-controlling interest in Company S				S $19,500	($71,500)	($75,000)
Total liabilities and equity	($3,055,000)	($800,000)				($3,321,000)

Table: (4)

Working note:

Statement of retained earnings	Company A	Company B	Debit	Credit	Non-controlling interest	Consolidated Balances
Retained earnings on 01/01	($1,367,000)	($340,000)	$13,500			($1,353,500)
Net Income	($428,000)	($120,000)				($414,500)
Dividends declared	$110,000	$70,000		D 63,000	D 7,000	$110,000
Retained earnings on 31/12	($1,685,000)	($390,000)				($1,658,000)

Table: (5)