Chapter 6, Problem 6.11.2P

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: Consolidated worksheet for Company P and Company S for the year ended December 31, 2016.

Explanation of Solution

Prepare the consolidated worksheet for Company P and Company S for the year ended December 31, 2016:

Company P and Company S
Consolidation Worksheet
Year ending December 31, 2016
	Trial Balance		Adjustments
Particulars	Company P	Company S	Debit	Credit	Consolidated income	NCI	Retained earnings	Consolidated Balances
Inventory	$105,000	$90,000		$4,800				$190,200
Cash	$92,400	$53,200						$145,600
Accounts receivable	$150,600	$90,000		$6,000				$234,600
Land	$100,000	$120,000						$220,000
Investment in Company S	$503,120			$20,160(CY1)
			$8,000(CY2)
				$336,960
				$154,000(D)				$0
Building	$800,000	$250,000	$100,000					$1,150,000
Accumulated Depreciation	($250,000)	($70,000)		$10,000				($330,000)
Plant and Equipment	$210,000	$120,000	$50,000	$40,000				$340,000
Accumulated Depreciation	($115,000)	($90,000)		$20,000
			$8,000
			$8,000					($209,000)
Goodwill		$30,000	$42,500					$72,500
Accounts payable	($70,000)	($40,000)	$6,000					($104,000)
Current tax liability	($82,640)	($16,800)						($99,440)
Bonds payable		($100,000)						($100,000)
Deferred tax liability	($4,250)		$19,754
			$2,702					$18,206
Common stock (Company S)		($10,000)	$8,000			($2,000)
Paid-in capital in excess of par (Company S)		($190,000)	$152,000			($38,000)
Retained earnings (Company S)		($221,200)	$176,960
			$3,000
			$720
			$0	$38,500
				$288		($79,308)
Common stock (Company P)	($100,000)							($100,000)
Paid-in capital in excess of par (Company P)	($600,000)							($600,000)
Retained earnings (Company P)	($617,683)		$12,000
			$2,880
			$32,000	$19,466			($590,269)
Sales	($890,000)	($350,000)	$30,000		($1,210,000)
Cost of goods sold	$480,000	$220,000	$4,800	$30,000(IS)
				$3,600(BI)	$671,200
Depreciation expense	$55,000	$20,000	$15,000
				$8,000	$82,000
Other expenses	$150,000	$60,000			$210,000
Interest expense		$8,000			$8,000
Provision for tax	$83,613	$16,800		$2,702	$97,711
Subsidiary income	($20,160)		$20,160(CY1)
Dividend declared, Company S		$10,000		$8,000(CY2)		$2,000
Dividend declared, Company P	$20,000						$20,000
	$0	$0
Consolidated net income					($141,089)			$0
NCI					$ 1,896	($1,896)
Controlling interest					($139,193)		($139,193)
Total NCI						($119,204)		($119,204)
Retained earnings of Controlling Interest							($709,462)	($709,462)
Total			$702,476	$702,476				$0

Table: (1)

Income Distribution Schedule of Company S
Particulars	Amount
Net income (internally generated)	$ 42,000
Less: Amortization	$ (15,000)
Less: Unrealized profit in ending inventory	$ (4,800)
Less: Gain on equipment	$ 3,600
Adjusted income	$ 25,800
Provision for tax	$ (11,520)
Net income	$ 14,280
Non-controlling share of Company S	$ (1,896)
Controlling interest share	$ 12,384

Table: (2)

Income Distribution Schedule of Company P
Particulars	Amount
Net income (internally generated)	$ 205,000
Add: Gain realized in current year	$ 8,000
Adjusted income	$ 213,000
Provision for tax	$ (85,200)
Net income	$ 127,800
Share in adjusted income of Company S	$ 12,384
Tax charged on income of subsidiary	$ (991)
Controlling share of Company P	$ 139,193

Table: (3)

Working note 1:

Particulars	Controlling interest	NCI	Total
Adjusted income(Total)	$ 20,640	$ 5,160	$ 25,800
Share of NCI in adjustment of assets	$ -	$ 3,000	$ 3,000
Taxable income	$ 20,640	$ 8,160	$ 28,800
Tax @40%	$ 8,256	$ 3,264	$ 11,520
Share of income after tax	$ 12,384	$ 1,896	$ 14,280

Table: (4) Working note 2:

Adjustments and eliminations:

• CY1: Income of subsidiary eliminated which is about the current year.
• CY2: The dividend of the current year eliminated.
• EL: The interest of Company P eliminated from the equity of the subsidiary.
• D: the excess of fair value distributed to NCI and Controlling interest.
• A: Amortization expense eliminated.
• IS: Inter-company sales eliminated.
• BI: The unrealized profit in beginning inventory eliminated.
• EI: Profit in ending inventory eliminated.

Working note 3:

Particulars	Controlling interest	NCI	Total
To beginning retained earnings:
Subsidiary transactions:
Beginning inventory	$2,880	720	$ 3,600
Remaining profit in fixed asset
Amortization	$12,000	0	$ 12,000
Total	$14,880	$720	$ 15,600
First tax	$5,952	$288	$ 6,240
Second tax	$714	$0	$ 714
Parent transactions:			$ -
Beginning inventory	$0	$0	$ -
Remaining profit in fixed asset			$ 32,000
Total			$ 32,000
First tax	12800		$(12,800)
Total retained earnings adjustments	$19,466	$288	$19,754
To current year:
Subsidiary transactions:
Beginning inventory	($2,880)	-720	$ (3,600)
Ending inventory	$3,840	960	$ 4,800
Sale of fixed assets	$0	0	$ -
Realized profit on fixed assets	0	0	$ -
Amortization	$12,000	0	$ 12,000
Total	$12,960	$240	$ 13,200
First tax	$5,184	$96	$ 5,280
Second tax	$622	$0	$ 622
Parent transactions:			$ -
Beginning inventory	$0	$0	$ -
Ending inventory	$0	$0	$ -
Sale of fixed assets	$0	$0	$ -
Realized profit on fixed assets			$ (8,000)
Total			$ (8,000)
First tax	-3200		$ (3,200)
Total retained earnings adjustments	$2,606	$96	$2,702

Table: (5)