35. On December 31, 20X1, Parent Company purchased 80% of the common stock of Subsidiary Company for
$280,000. On this date, Subsidiary had total owners’ equity of $250,000 (common stock $20,000; other paid-in
capital, $80,000; and retained earnings, $150,000). Any excess of cost over book value is due to the under or
overvaluation of certain assets and liabilities. Inventory is undervalued $5,000. Land is undervalued $20,000.
Buildings and equipment have a fair value which exceeds book value by $30,000. Bonds payable are
overvalued $5,000. The remaining excess, if any, is due to goodwill.
Required:
a.
Prepare a value analysis schedule for this business combination.
b.
Prepare the determination and distribution schedule for this business combination
c.
Prepare the necessary elimination entries in general journal form.
Fair Value
Company fair value
$ 350,000
$ 280,000
$ 70,000
Fair value identifiable net assets
310,000
248,000
62,000
Goodwill
$ 40,000
$ 32,000
$ 8,000
Fair value of subsidiary
$ 350,000
$ 280,000
$ 70,000
Less book value:
Common stock
$ 20,000
Paid-in capital in excess of par
80,000
Retained earnings
150,000
Total Equity
$ 250,000
$ 250,000
$250,000
Interest Acquired
80%
20%
Book value
$ 200,000
$ 50,000
Excess of FV over BV
$ 100,000
$ 80,000
$ 20,000
Adjust identifiable accounts:
Inventory
$ 5,000
Land
20,000
Buildings & equipment
30,000
Discount on bonds payable
5,000
Goodwill
40,000
Total
$ 100,000
36. On January 1, 20X1, Parent Company purchased 100% of the common stock of Subsidiary Company for
$280,000. On this date, Subsidiary had total owners’ equity of $240,000.
On January 1, 20X1, the excess of cost over book value is due to a $15,000 undervaluation of inventory, to a
$5,000 overvaluation of Bonds Payable, and to an undervaluation of land, building and equipment. The fair
value of land is $50,000. The fair value of building and equipment is $200,000. The book value of the land is
$30,000. The book value of the building and equipment is $180,000.
Required:
a.
Using the information above and on the separate worksheet, complete a value analysis schedule
b.
Complete schedule for determination and distribution of the excess of cost over book value.
c.
Complete the Figure 2-5 worksheet for a consolidated balance sheet as of January 1, 20X1.
Figure 2-5
Trial Balance
Trial Balance
Eliminations and
Parent
Sub.
Adjustment
s
Account Titles
Company
Company
Debit
Credit
Assets:
Inventory
50,000
30,000
Other Current Assets
239,000
165,000
Investment in Subsidiary
280,000
Land
120,000
30,000
Buildings
350,000
230,000
Accumulated Depreciation
(100,000)
(50,000)
Other Intangibles
40,000
Total
979,000
405,000
Liabilities and Equity:
Current Liabilities
191,000
65,000
Bonds Payable
100,000
Common Stock – P Co.
100,000
Paid-in Cap. in Exc. – P Co.
150,000
Retained Earnings – P Co.
538,000
Common Stock – S Co.
50,000
Paid-in Cap. in Exc. – S Co.
70,000
Retained Earnings – S Co.
120,000
NCI
Total
979,000
405,000
(continued)
Consolidated
Consolidated
Balance Sheet
Account Titles
NCI
Debit
Credit
Assets:
Inventory
Other Current Assets
Investment in Subsidiary
Land
Buildings
Accumulated Depreciation
Other Intangibles
Total
Liabilities and Equity:
Current Liabilities
Bonds Payable
Common Stock – P Co.
Paid-in Cap. in Exc. – P Co.
Retained Earnings – P Co.
Common Stock – S Co.
Paid-in Cap. in Exc. – S Co.
Retained Earnings – S Co.
NCI
Total
Company Implied
Parent Price
Company fair value
$280,000
$280,000
Fair value identifiable net assets
300,000
300,000
Gain on acquisition
$(20,000)
$(20,000)
37. On January 1, 20X1, Parent Company purchased 90% of the common stock of Subsidiary Company for
$252,000. On this date, Subsidiary had total owners’ equity of $240,000 consisting of $50,000 in common
stock, $70,000 additional paid-in capital, and $120,000 in retained earnings.
On January 1, 20X1, the excess of cost over book value is due to a $15,000 undervaluation of inventory, to a
$5,000 overvaluation of Bonds Payable, and to an undervaluation of land, building and equipment. The fair
value of land is $50,000. The fair value of building and equipment is $200,000. The book value of the land is
$30,000. The book value of the building and equipment is $180,000.
Required:
a.
Complete the valuation analysis schedule for this combination.
b.
Complete the determination and distribution schedule for this combination.
c.
Prepare, in general journal form, the elimination entries required to prepare a consolidated balance sheet for Parent and Subsidiary on
January 1, 20X1.
Value analysis schedule
Fair Value
Company fair value
$ 282,000**
$ 252,000
$ 30,000*
Fair value identifiable net assets
300,000
270,000
30,000
Gain on acquisition
$ (18,000)
$ (18,000)
$ –
b.
Determination and distribution schedule
Fair Value
Fair value of subsidiary
$ 282,000
$ 252,000
$ 30,000
Less book value:
Common stock
$ 50,000
Paid-in capital in excess of par
70,000
Retained earnings
120,000
Total Equity
$ 240,000
$ 240,000
$240,000
Interest Acquired
90%
10%
Book value
$ 216,000
$ 24,000
Excess of fair over book value
$ 42,000
$ 36,000
$ 6,000
Adjust identifiable accounts:
Inventory
$ 15,000
Land
20,000
Buildings and equipment
20,000
Gain on acquisition
(18,000)
38. The following consolidated financial statement was prepared immediately following the acquisition of Salt,
Inc. by Pepper Co.
Consolidated
Individual Balance
Sheets
Financial
Pepper Co.
Salt Inc.
Statements
Cash
$ 26,000
$ 20,000
$ 46,000
Accounts Receivable, net
20,000
30,000
50,000
Inventory
125,000
110,000
270,000
Land
30,000
80,000
124,000
Building and Equipment
320,000
160,000
459,000
Investment in Subsidiary
279,000
–
–
Goodwill
–
–
41,000
Total Assets
$800,000
$400,000
$990,000
Accounts Payable
$ 40,000
$ 40,000
$ 80,000
Other Liabilities
70,000
60,000
130,000
Common Stock
400,000
200,000
400,000
Retained Earnings
290,000
100,000
290,000
Noncontrolling Interest
–
–
90,000
Total Liabilities & Stockholders’ Equity
$800,000
$400,000
$990,000
Answer the following based upon the above financial statements:
a.
How much did Pepper Co. pay to acquire Salt Inc.?
b.
What was the fair value of Salt’s Inventory at the time of acquisition?
c.
Was the book value of Salt’s Building and Equipment overvalued or undervalued relative to the Building and Equipment’s fair value at the
time of acquisition?
Investment in subsidiary
$279,000
b.
Consolidated inventory
$270,000
Pepper Co. inventory
125,000
Fair value attributable to Salt
$145,000
Consolidated buildings and equipment
$459,000
Pepper Co. buildings and equipment
320,000
Fair value attributable to Salt
$139,000
c.
The Building and Equipment’s book value was overvalued $21,000 relative to
the fair value.
The book value was $160,000 vs. $139,000 fair value.
39. Supernova Company had the following summarized balance sheet on December 31, 20X1:
Assets
Accounts receivable
$ 200,000
Inventory
450,000
Property and plant (net)
600,000
Goodwill
150,000
Total
$1,400,000
Liabilities and Equity
Notes payable
$ 600,000
Common stock, $5 par
300,000
Paid-in capital in excess of par
400,000
Retained earnings
100,000
Total
$1,400,000
The fair value of the inventory and property and plant is $600,000 and $850,000, respectively.
Required:
a.
Assume that Redstar Corporation purchases
100% of the common stock of Supernova
Company for $1,800,000. What value will be
assigned to the following accounts of the
Supernova Company when preparing a
consolidated balance sheet on December 31,
20X1?
(1)
Inventory
_________
(2)
Property and plant
_________
(3)
Goodwill
_________
(4)
Noncontrolling interest
_________
b.
Prepare a valuation schedule
c.
Prepare a supporting determination and
distribution of excess schedule.
(1)
Inventory
$600,000
($450,000 BV + $150,000)
(2)
Property and plant
$850,000
($600,000 BV + $250,000)
(3)
Goodwill
$750,000
(4)
Noncontrolling interest
0
No NCI – 100% acquisition
Company Implied
Parent Price
Company fair value
$ 1,800,000
$ 1,800,000
Fair value identifiable net assets
1,050,000
1,050,000
Goodwill
$ 750,000
$ 750,000
40. Fortuna Company issued 70,000 shares of $1 par stock, with a fair value of $20 per share, for 80% of the
outstanding shares of Acappella Company. The firms had the following separate balance sheets prior to the
acquisition:
Assets
Fortuna
Acappella
Current assets
$2,100,000
$ 960,000
Property, plant, and equipment (net)
4,600,000
1,300,000
Goodwill
–
240,000
Total assets
$6,700,000
$2,500,000
Liabilities and Stockholders’ Equity
Liabilities
$3,000,000
$ 800,000
Common stock ($1 par)
800,000
Common stock ($5 par)
200,000
Paid-in capital in excess of par
2,200,000
300,000
Retained earnings
700,000
1,200,000
Total liabilities and equity
$6,700,000
$2,500,000
Book values equal fair values for the assets and liabilities of Acappella Company, except for the property, plant, and equipment, which has a fair
value of $1,600,000.
Required:
a.
Prepare a value analysis schedule
b.
Prepare a determination and distribution of excess schedule.
c.
Provide all eliminations on the partial balance sheet worksheet provided in Figure 2-9 and complete the noncontrolling interest column.
Figure 2-9
Fortuna Co. and Subsidiary
Acappella Co.
Partial Worksheet for Consolidated
Financial Statements
January 2, 20X4
Balance Sheet
Account Titles
Fortuna
Acappella
Current Assets
2,100,000
960,000
Property, Plant, and
Equipment
4,600,000
1,300,000
Investment in Acappella
1,400,000
Goodwill
240,000
Liabilities
(3,000,000)
(800,000)
Common Stock – Fortuna
(870,000)
Paid-in Capital in Excess
of Par – Fortuna
(3,530,000)
Retained Earnings – Fortuna
(700,000)
Common Stock – Acappella
(200,000)
Paid-in Capital in Excess
of Par – Acappella
(300,000)
Retained Earnings – Acappella
(1,200,000)
(continued)
Fortuna Co. and Subsidiary Acappella Co.
Partial Worksheet for Consolidated Financial
Statements
January 2, 20X4
Eliminat
ions and
Adjustm
ents
Account Titles
Debit
Credit
NCI
Current Assets
Property, Plant, and
Equipment
Investment in Acappella
Goodwill
Liabilities
Common Stock – Fortuna
Paid-in Capital in Excess
of Par – Fortuna
Retained Earnings – Fortuna
Common Stock – Acappella
Paid-in Capital in Excess
of Par – Acappella
Retained Earnings – Acappella
Company Implied Fair Value
Parent Price
NCI Value
Company fair value
$ 1,752,000
$1,400,000
$ 352,000*
Fair value identifiable net assets
1,760,000
1,408,000
352,000
Gain on acquisition
$ (8,000)
(8,000)
$ –
Company Implied Fair Value
Parent Price
NCI Value
Fair value subsidiary
$1,752,000
$1,400,000
$352,000
Less book value:
Comm Stock
200,000
APIC
300,000
Ret Earn
1,200,000
Total S/E
1,700,000
1,700,000
1,700,000
Interest acquired
80%
20%
Book value
1,360,000
340,000
Excess of fair over book
52,000
40,000
12,000
Adjust identifiable accounts:
Plant and equipment
300,000
Goodwill
(240,000)
Gain on acquisition
(8,000)
Total
52,000
For the worksheet solution, please refer to Answer 2-9.
41. Mans Company is about to purchase the net assets of Eagle Incorporated, which has the following balance
sheet:
Assets
Accounts receivable
$ 60,000
Inventory
100,000
Equipment
$ 90,000
Accumulated depreciation
(50,000)
40,000
Land and buildings
$300,000
Accumulated depreciation
(100,000)
200,000
Goodwill
60,000
Total assets
$460,000
Liabilities and Stockholders’ Equity
Bonds payable
$ 80,000
Common stock, $10 par
200,000
Paid-in capital in excess of par
100,000
Retained earnings
80,000
Total liabilities and equity
$460,000
Mans has secured the following fair values of Eagle’s accounts:
Inventory
$130,000
Equipment
60,000
Land and buildings
260,000
Bonds payable
60,000
Acquisition costs were $20,000.
Required:
Record the entry for the purchase of the net assets of Eagle by Mans at the following cash prices:
a.
$450,000
b.
$310,000
c.
$480,000
Fair value of acquired net assets:
Accounts receivable
$ 60,000
Inventory
130,000
Equipment
60,000
Land and buildings
260,000
Bonds payable
(60,000)
$450,000
42. Discuss the conditions under which the SEC would assume a presumption of control. Additionally, under
what circumstances might consolidation be required even though the parent does not control the subsidiary?
When would it not be appropriate to consolidate when more than 50% of the voting stock is held?
43.
A parent company purchases an 80% interest in a subsidiary at a price high enough to revalue all assets and
allow for goodwill on the interest purchased. If “push down accounting” were used in conjunction with the
“economic entity concept,” what unique procedures would be used?