Chapter 4, Problem 4.1P

To determine

Business combination:

Business combination refers tothe combining of one or more business organizations in a single entity. The business combination leads to the formation of combined financial statements. After business combination, the entities having separate control merges into one having control over all the assets and liabilities. Merging and acquisition are types of business combinations.

Consolidated financial statements:

The consolidated financial statements refer to the combined financial statements of the entities which are prepared at the year-end. The consolidated financial statements are prepared when one organization is either acquired by the other entity or two organizations merged to form the new entity.The consolidated financial statements serve the purpose of both the entities about financial information.

Value analysis:

The value analysis in a business combination is an essential part of determining the worth of the acquired entity. The goodwill or gain on acquisition is computed in the value analysis. If the net worth of the acquired entity is less than the consideration paid, then it results in goodwill, and if the net worth of the acquired entity is more than the consideration paid, then it results in gain on the acquisition.

To Prepare:

The worksheet for consolidated income statement and balance along withthe determination and distribution of excess schedule.

Answer to Problem 4.1P

Company P and Company S
Consolidation Worksheet
Year ending December 31, 2015
	Trial Balance		Adjustments
Balance Sheet	Company P	Company S	Debit	Credit	Income	Retained earnings	NCI	Consolidated Balances
Cash	$735,000	$370,000						$1,105,000
Accounts receivable	$400,000	$365,000		$30,000				$735,000
Inventory	$600,000	$275,000		$12,500				$862,500
Property, plant and equipment	$4,000,000	$2,300,000	$300,000	$30,000				$6,570,000
Investment in Company S	$3,510,000			$210,000
				$3,000,000
				$300,000
Accounts payable	($35,000)	($100,000)	$30,000					($105,000)
Common stock (Company P)	($1,000,000)							($1,000,000)
Paid-in capital in excess of par (Company P)	($1,500,000)							($1,500,000)
Retained earnings (Company P)	($5,500,000)					($5,500,000)		$0
Common stock (Company S)		($400,000)	$400,000					$0
Paid-in capital in excess of par (Company S)		($200,000)	$200,000					$0
Retained earnings (Company S)		($2,400,000)	$2,400,000					$0
Sales	($12,000,000)	($1,000,000)	$300,000		($12,700,000)
Cost of goods sold	$7,000,000	$750,000	$12,500	$300,000	$7,462,500
Other expenses	$4,000,000	$40,000	$30,000		$4,070,000
Subsidiary income	($210,000)		$210,000
	$0	$0
Consolidated net income					($1,167,500)	($1,167,500)		$0
Retained earnings of Controlling Interest						($6,667,500)		$6,667,500

Table: (1)

Explanation of Solution

Company P and Company S
Consolidation Worksheet
Year ending December 31, 2015
	Trial Balance		Adjustments
Balance Sheet	Company P	Company S	Debit	Credit	Income	Retained earnings	NCI	Consolidated Balances
Cash	$735,000	$370,000						$1,105,000
Accounts receivable	$400,000	$365,000		(IA)$30,000				$735,000
Inventory	$600,000	$275,000		$12,500				$862,500
Property, plant and equipment	$4,000,000	$2,300,000	$300,000 (D)	(A) $30,000				$6,570,000
Investment in Company S	$3,510,000			(CY1)$210,000
				(EL) $3,000,000
				(D) $300,000
Accounts payable	($35,000)	($100,000)	$30,000					($105,000)
Common stock (Company P)	($1,000,000)							($1,000,000)
Paid-in capital in excess of par (Company P)	($1,500,000)							($1,500,000)
Retained earnings (Company P)	($5,500,000)					($5,500,000)		$0
Common stock (Company S)		($400,000)	(EL)$400,000					$0
Paid-in capital in excess of par (Company S)		($200,000)	(EL)$200,000					$0
Retained earnings (Company S)		($2,400,000)	(EL)$2,400,000					$0
Sales	($12,000,000)	($1,000,000)	(IS)$300,000		($12,700,000)
Cost of goods sold	$7,000,000	$750,000	$12,500	(IS) $300,000	$7,462,500
Other expenses	$4,000,000	$40,000	(A)$30,000		$4,070,000
Subsidiary income	($210,000)		(CY1)$210,000
	$0	$0
Consolidated net income					($1,167,500)	($1,167,500)		$0
Retained earnings of Controlling Interest						($6,667,500)		$6,667,500

Table: (2)

Value Analysis schedule:

Value analysis schedule	Company-Implied fair value	Parent price (100%)	Non-controlling interest value (0%)
Fair value of subsidiary	$3,300,000	$3,300,000	Not applicable
Fair value of net assets excluding goodwill	$3,000,000	$3,000,000
Goodwill	$300,000	$300,000

Table: (3)

Determination and distribution of excess schedule:

Determination and distribution of excess schedule
Particulars	Company Implied fair value	Parent price (100%)	Non-controlling interest value (0%)
Fair value of subsidiary (a)	$3,300,000	$3,300,000	Not applicable
Book value of interest acquired
Common stock	$400,000
Paid-in capital in excess of par	$200,000
Retained earnings	$2,400,000
Total equity	$3,000,000	$3,000,000
Interest acquired		100%
Book value (b)	$3,000,000	$3,000,000
Excess of fair value over book value [c] = (a) - (b)	$300,000	$300,000

Table: (4)

Elimination and adjustments:

• CY1: Eliminate the entry of parent’s share of net income in subsidiary.

• EL: Eliminate the balance of equity of subsidiary

• D: The excess of determination schedule is allotted to equipment.

• A: The depreciation expense of the year increased.

• IS: The intra-entity sales of $300,000 eliminated.

• IA: The inter-company trade balance of $30,000 eliminated.

Working note:

Calculate the amount of amortization of equipment over 10 years:

  $\begin{array}{c}Amortizationofequipment=\frac{Excessof\cos toverbookvalue}{Numberofyears}\\ =\frac{\$300,000}{10}\\ =\$30,000\end{array}$