Chapter 6, Problem 49P

To determine

Determine consolidated financial totals for the given business combination.

Explanation of Solution

The consolidated financial totals for the given business combination is as follows:

Company P and Company S
Consolidation Worksheet
Year ending December 31, 2018
Income statement		Company P	Company S	Debit	Credit	Consolidated Balances
Sales		($800,000)	($400,000)	(TI)    90,000		($1,110,000)
Cost of goods sold		$528,000	$260,000	(G)      6,000	(TI)   90,000	$704,000
Expenses		$180,000	$130,000	(E)    11,000	(ED)   2,000	$319,000
Gain on sale of equipment		($8,000)	$0	(TA)    8,000		$0
Net income		($100,000)	($10,000)			($87,000)
Balance Sheet
Cash		$30,000	$40,000
Accounts receivable		$300,000	$100,000		(P)    28,000
Inventory		$260,000	$180,000		(G)      6,000
Investment in Company S		$560,000	$0		(S)  450,000
					(A)  110,000
Land, buildings, and equipment		$680,000	$500,000	(TA)  10,000
Accumulated depreciation		($180,000)	($90,000)	(ED)    2,000	(TA)  18,000
Intangible Asset		$0	$0	(A)  110,000	(E)    11,000
Total assets		$1,650,000	$730,000			$1,879,000
Accounts payable		($140,000)	($90,000)	(P)    28,000		($202,000)
Long-term liabilities		($240,000)	($180,000)			($420,000)
Preferred stock		$0	($100,000)	(S)100,000		$0
Common stock		($620,000)	($200,000)	(S)  200,000		($620,000)
Additional paid-in capital		($210,000)	$0			($210,000)
Retained earnings, 12/31		($440,000)	($160,000)			($427,000)
Total liabilities and stockholders’ equity		($1,650,000)	($730,000)	$715,000	$715,000	($1,879,000)

Table: (1)

Working note:

Statement of retained earnings		Company P	Company S	Debit	Credit	Consolidated Balances
Retained earnings, 1/1		($400,000)	($150,000)	(S)  150,000
Net income		($100,000)	($10,000)
Dividends declared		$60,000	$0
Retained earnings, 12/31		($440,000)	($160,000)			($427,000)

Table: (2)

Computation of unrealized gross profit:

Particulars	Amount
Rate of gross profit $\left(\frac{\$90,000-\$60,000}{\$90,000}\times 100\right)$	33.33%
Inventory unsold at year end	$ 18,000
Unrealized gross profit	$   6,000

Table: (3)

Computation of annual amortization:

Particulars	Amount
Consideration paid	$ 560,000
Book value of Company S	$ 450,000
Excess fair value over book value	$ 110,000
Annual amortization of intangible asset (10 years)	$   11,000

Table: (4)

Computation of gain on sale of equipment:

Particulars	Amount
Carrying amount of equipment	$   20,000
Book value of equipment	$   12,000
Gain on sale	$   10,000
Depreciation $\left(\$20,000÷4\right)$	$     5,000
Accumulated depreciation	$     5,000

Table: (5)

Worksheet adjustments:

Entry S
Date	Accounts Title and Explanation	Post Ref.	Debit	Credit
	Common stock		$100,000
	Preferred stock		$200,000
	Retained earnings on 01/01/2018		$150,000
	Investment in Company S			$  450,000
	(being  stock of subsidiary eliminated)
Entry A
Date	Accounts Title and Explanation	Post Ref.	Debit	Credit
	Intangible asset		$110,000
	Investment in Company S			$  110,000
	(being excess fair value transferred to intangible asset)
Entry E
Date	Accounts Title and Explanation	Post Ref.	Debit	Credit
	Amortization expense		$  11,000
	Intangible asset			$    11,000
	(being amortization on intangible asset recorded)
Entry P
Date	Accounts Title and Explanation	Post Ref.	Debit	Credit
	Accounts Payable		$  28,000
	Accounts Receivable			$    28,000
	(being intra-entity receivables and payables eliminated)
Entry TA
Date	Accounts Title and Explanation	Post Ref.	Debit	Credit
	Equipment		$  10,000
	Gain on sale of equipment		$    8,000
	Accumulated Depreciation			$    18,000
	(Being excess depreciation and gain eliminated)

Table: (6)