Chapter 4, Problem 4.2.1P

To determine

Business combination:

Business combination refers to the 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.

:

Prepare the worksheet necessary to produce the consolidated financial statements of Company B and its subsidiary for the year ended March 31, 2017 including the determination and distribution of excess schedule and the income distribution schedule.

Explanation of Solution

Prepare the worksheet necessary to produce the consolidated financial statements of Company B and its subsidiary for the year ended March 31, 2017:

Company B and Company C
Consolidation Worksheet
Year ending December 31, 2015
	Trial Balance		Adjustments
Balance Sheet	Company B	Company C	Debit	Credit	Income	NCI	Retained earnings	Consolidated Balances
Cash	$191,200	$44,300						$235,500
Accounts receivable	$290,000	$97,000		$10,000
				$5,000				$372,000
Inventory	$310,000	$80,000		$1,200
				$750				$388,050
Investment in Company C	$450,000		$32,000	$352,000
				$130,000				$0
Land	$1,081,000	$150,000						$1,231,000
Building and Equipment	$1,850,000	$400,000						$2,250,000
Accumulated Depreciation	($940,000)	($210,000)						($1,150,000)
Goodwill	$60,000		$162,500					$222,500
Accounts payable	($242,200)	($106,300)	$10,000
			$5,000					($333,500)
Bonds payable	($400,000)							($400,000)
Common stock (Company B)	($250,000)							($250,000)
Paid-in capital in excess of par (Company B)	($1,250,000)							($1,250,000)
Retained earnings (Company B)	($1,105,000)			$32,000				$0
			$1,800
			$800				($1,134,400)
Common stock (Company C)		($200,000)	$160,000			($40,000)
Paid-in capital in excess of par (Company C)		($100,000)	$80,000			($20,000)
Retained earnings (Company C)		($140,000)	$112,000	$32,500
			$200			($60,300)
Sales	($880,000)	($630,000)	$32,000
			$30,000		($1,448,000)
Dividend income for Company C	($24,000)		$24,000
Cost of goods sold	$704,000	$504,000	$1,200	$1,800
			$750	$32,000
				$1,000
				$30,000	$1,145,150
Other expenses	$130,000	$81,000			$211,000
Dividend income for Company C	$25,000	$30,000		$24,000		$6,000	$25,000
	$0	$0	$652,250	$652,250
Consolidated net income					($91,850)			$0
NCI					$9,050	($9,050)
Controlling interest					$82,800		($82,800)
Total NCI						($123,350)		($123,350)
Retained earnings of Controlling Interest								$1,192,200

Table: (1)

Value Analysis schedule and determination and distribution of excess schedule:

Value analysis schedule	Company-Implied fair value	Parent price (80%)	Non-controlling interest value (20%)
Fair value of subsidiary	$562,500	$450,000	$112,500
Fair value excluding goodwill	$400,000	$400,000
Goodwill	$162,500	$50,000	$112,500
Determination and distribution of excess schedule
Particulars	Company Implied fair value	Parent price (100%)	Non-controlling interest value (0%)
Fair value of subsidiary (a)	$562,500	$450,000	$112,500
Book value of interest acquired:
Common stock	$200,000
Paid-in capital in excess of par	$100,000
Retained earnings	$100,000
Total equity	$400,000		$400,000
Interest acquired			80%
Book value of interest acquired	$400,000		$320,000
Balance (b)			$80,000
Excess of fair value over book value [c] = (a) - (b)			$32,500
Goodwill			$162,500

Table: (2)

Income distribution schedules:

Income Distribution Schedule of Company C
Particulars	Amount
Net income (internally generated)	$ 45,000
Less: Unrealized profit in ending inventory	$ (750)
Add: Profit realized in beginning inventory	$ 1,000
Adjusted income	$ 45,250
Non-controlling share of Company C	$ 9,050

Table: (3)

Income Distribution Schedule of Company B
Particulars	Amount
Net income (internally generated)	$ 46,000
Less: Unrealized profit in ending inventory	$ (1,200)
Add: Profit realized in beginning inventory	$ 1,800
Adjusted income	$ 46,600
Share in adjusted income of Company C	$ 36,200
Controlling share of Company B	$ 82,800

Table: (4)

Working note 1:

Calculate the amount of reduction in investment:

The investment is changed because of use of equity method. The value of investment is reduced by the amount of share of interest in Company C.

  $\begin{array}{c}\mathrm{Re}ductionininvestment=Changeinequity\times 80\%\\ =\$40,000\times 80\%\\ =\$32,000\end{array}$

Working note 2:

• The equity of the subsidiary is eliminated with $160,000 as common stock, $80,000 as paid-in-capital in excess of par and retained earnings of $112,000.
• The inter-company profit of the sales of inventory is: $\left(\$9,000\times 20\%\right)=\$1,800$ . It is to be eliminated in consolidated balances.
• Dividend which has been received from Company C will not be taken in the consolidated balances. It is inter-company dividend.
• The inter-company sales of $32,000 is eliminated which occurred in period of April 2016 to March 2017.
• The inter-company profit of the sales of inventory is: $\left(\$6,000\times 20\%\right)=\$1,200$ . It is to be eliminated in consolidated balances.
• The inter-company profit of beginning inventory is: $\left(\$4,000\times 25\%\right)=\$1,000$ . It is to be eliminated in consolidated balances.
• Sales made by Company C to Company B should be eliminated while preparing the consolidated balances.
• The inter-company profit of sales made by Company C to Company B is: $\left(\$3,000\times 25\%\right)=\$750$ . It is to be eliminated in consolidated balances.