Chapter 4, Problem 41P

a.

To determine

Explain the manner in which Company A allocate Company S’s total acquisition-date fair value (January 1, 2015) to the assets acquired and liabilities assumed for consolidation purposes.

Explanation of Solution

Company S’s total acquisition-date fair value (January 1, 2015) to the assets acquired and liabilities assumed for consolidation purposes:

Particulars	Amount
Fair value of subsidiary on 01/01/13	$  1,750,000
Book value of subsidiary on 01/01/13	$(1,300,000)
Excess fair value over book value	$     450,000
Customer contract	$   (400,000)
Goodwill	$       50,000

Table: (1)

b.

To determine

Show how the following amount on Company A’s pre-consolidation 2015 statements were derived:

• Equity in earnings of Company S
• Gain on revaluation of Investment in Company S to fair value
• Investment in Company S

Explanation of Solution

Computation of Equity in earnings of Company S:

Particulars	Amount
Net income in 2013	$     142,500
Amortization in 2013	$     (95,000)
Equity in earnings of Company S	$       47,500

Table: (2)

Computation of Gain on revaluation of Investment in Company S to fair value:

Particulars	Amount
Consideration transferred in 2012	$     184,500
Income in 2012	$       15,000
Dividends in 2012	$       (4,500)
Book value as on 01/01/2013	$     195,000
Fair value as on 01/01/13	$     262,500
Gain on Revaluation	$       67,500

Table: (3)

Computation of Investment in Company S:

Particulars	Amount
Fair value as on 01/01/2012	$     262,500
Consideration given on 01/01/2013	$  1,400,000
Equity earnings in 2013	$       47,500
Dividends in 2013	$     (38,000)
Investment in Company S	$  1,672,000

Table: (4)

c.

To determine

Prepare a worksheet to consolidate the financial statements of these two companies as of December 31, 2015.

Explanation of Solution

The worksheet to consolidate the financial statements of these two companies as of December 31, 2015:

Income statement	Company A	Company S	Debit	Credit	Non-controlling interest	Consolidated Balances
Revenues	($931,000)	($380,000)	S 200,000			($1,311,000)
Operating expense	$615,000	$230,000	E 100,000			$945,000
Equity in income of Company S	($47,500)	$                -	I 47,500			$                 -
Revaluation gain	($67,500)	$                -				($67,500)
Net income	($431,000)	($150,000)
Consolidated net income						($433,500)
Share of non-controlling interest in net income					($2,500)	$2,500
Share of controlling interest in net income						($431,000)
Balance Sheet
Current assets	$288,000	$540,000				$828,000
Investment in Company S	$1,672,000	$                -	D 38,000	$1,235,000
				$47,500
				$427,500
Property, plant and equipment	$826,000	$590,000				$1,416,000
Patented technology	$850,000	$370,000				$1,220,000
Customer contract	$                -	$                -	A 400,000	E 100,000		$300,000
Goodwill		$                -	A 50,000			$50,000
Total assets	$3,636,000	$1,500,000				$3,814,000
Liabilities	($1,300,000)	($90,000)				($1,390,000)
Common stock	($900,000)	($500,000)	$500,000			($900,000)
Additional paid-in capital	($180,000)	($200,000)	$200,000			($180,000)
Retained earnings	($1,256,000)	($710,000)				($1,256,000)
Non-controlling interest in Company S				S $65,000
				A $22,500	($87,500)
					($88,000)	($88,000)
Total liabilities and equity	($3,636,000)	($1,500,000)	$1,935,500	$1,935,500		$3,814,000

Table: (5)

Working note:

Statement of retained earnings	Company A	Company S	Debit	Credit	Non-controlling interest	Consolidated Balances
Retained earnings on 01/01	$   (965,000)	$   (600,000)	$   600,000			$    (965,000)
Net Income	$   (431,000)	$   (150,000)				$    (431,000)
Dividends declared	$     140,000	$       40,000		D 38,000	$       2,000	$     140,000
Retained earnings on 31/12	$(1,256,000)	$   (710,000)				$ (1,256,000)

Table: (6)