
Concept explainers
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
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 | ||||||||
Adjustments | ||||||||
Company P | Company S | Debit | Credit | Income | NCI | Consolidated Balances | ||
Cash | $735,000 | $370,000 | $1,105,000 | |||||
$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:
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