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17. (20 minutes) (Record a merger combination with subsequent testing for
goodwill impairment).
a. In accounting for the combination, the total fair value of Beltran (consideration
transferred) is allocated to each identifiable asset acquired and liability
assumed with any remaining excess as goodwill.
Cash paid $ 450,000
Fair value of shares issued 1 ,248,000
Consideration transferred $1,698,000
Entry by Francisco to record assets acquired and liabilities assumed in the
combination with Beltran:
Cash 75,000
Receivables 193,000
Inventory 281,000
Goodwill 400,000
Accounts payable 121,000
Long-term liabilities 450,000
Cash 450,000
b. Step one in goodwill impairment test:
Fair value of reporting unit as a whole 1,425,000
Book value of reporting unit's net assets 1,585,000
Because the total fair value of the reporting unit is less than its carrying value,
a potential goodwill impairment loss exists, step two is performed:
Fair value of reporting unit as a whole $1,425,000
Fair values of reporting unit's net assets (excluding goodwill) 1 ,325,000
18. (20 minutes) (Goodwill impairment testing.)
a. Goodwill Impairment
Step 1
Fair value of reporting unit = $1,028
Carrying value of reporting unit = 1,094
Because fair value < carrying value, there is a potential goodwill impairment
loss.
Step 2
Fair value of reporting unit $1,028
Fair value of net assets excluding goodwill
Tangible assets $137
Recognized intangibles 326
Unrecognized intangibles 255 718
b.
Tangible assets, net $84
19. (30 minutes) (Goodwill impairment and intangible assets.)
Part a: Goodwill Impairment Test—Step 1
Total fair Carrying Potential goodwill
value value impairment?
Sand Dollar $510,000 < $530,000 yes
Part b: Goodwill Impairment Test—Step 2 (Sand Dollar and Salty Dog only)
Sand Dollar—total fair value $510,000
Fair values of identifiable net assets
Tangible assets $190,000
Trademark 150,000
Customer list 100,000
Salty Dog—total fair value $580,000
Fair values of identifiable net assets
Tangible assets $200,000
Unpatented technology 125,000
No impairment—implied value > carry value - 0 -
Part c:
No changes in tangible assets or identifiable intangibles are reported based
on goodwill impairment testing. The sole purpose of the valuation exercise
However, because the fair value of Sand Dollar’s trademark is less than its
20. (30 Minutes) (Consolidation entries for two years. Parent uses equity
method.)
Fair Value Allocation and Annual Amortization:
Acquisition fair value (consideration transferred) . $490,000
Book value (assets minus
liabilities or total stockholders'
Excess fair value assigned to specific
accounts based on individual fair values Remaining Annual excess
life amortizations
Land ...................................... $10,000 -- --
Buildings ............................ 40,000 4 yrs. $10,000
Equipment ........................... (20 ,000) 5 yrs. (4,000)
Total assigned to specific
Consolidation Entries as of December 31, 2014
Entry S
Common stock—Abernethy................................. 250,000
(To eliminate stockholders' equity accounts of subsidiary)
Entry A
Land ........................................................................ 10,000
Investment in Abernethy ................................. 90,000
(To recognize allocations attributed to fair value of specific accounts at
acquisition date with residual fair value recognized as goodwill).
Entry I
Equity in subsidiary earnings .............................. 74,000
20. (continued)
Entry D
Investment in Abernethy ...................................... 10,000
Dividends declared .......................................... 10,000
(To eliminate intra-entity dividend transfers)
Entry E
(To recognize current year amortization expense)
Consolidation Entries as of December 31, 2015
Entry S
Common stock—Abernethy ................................ 250,000
Investment in Abernethy ................................. 470,000
(To eliminate beginning stockholders' equity of subsidiary—the
Retained Earnings account has been adjusted for 2014 income and
dividends. Entry *C is not needed because equity method was applied.)
Entry A
Land ........................................................................ 10,000
Buildings ................................................................ 30,000
Investment in Abernethy ................................. 84,000
(To recognize allocations relating to investment—balances shown here
are as of beginning of current year [original allocation less excess
amortizations for the prior period])
Entry I
Equity in subsidiary earnings .............................. 104,000
Investment in Abernethy ................................. 104,000
(To eliminate $110,000 income accrual less $6,000 amortization recorded
by parent during 2015 using equity method)
Entry D
Same as Entry E for 2014
21. (35 Minutes) (Consolidation entries for two years. Parent uses initial value
method.)
Acquisition-date allocation and annual excess fair value amortizations:
Acquisition date value (consideration paid) ........ $500,000
Excess price paid over book value ..................... $100 ,000
Excess price paid assigned to specific Remaining Annual excess
accounts based on fair values life amortizations
Equipment $ 20,000 5 yrs. $4,000
Long-term liabilities 30,000 4 yrs. 7,500
Consolidation entries as of December 31, 2014
Entry S
Common stock—Abernethy ............................... 250,000
Additional paid-in capital .................................... 50,000
Entry A
Equipment ............................................................ 20,000
Long-term liabilities ............................................ 30,000
Goodwill ................................................................ 50,000
Investment in Abernethy ............................... 100,000
(To recognize allocations determined above in connection with
acquisition-date fair values)
Entry I
Dividend income .................................................. 10,000
Dividends declared ........................................ 10,000
(To eliminate intra-entity dividend declarations recorded by parent as
income)
Entry E
21. (continued)
Consolidation Entries as of December 31, 2015
Entry *C
Investment in Abernethy ..................................... 58,500
Retained earnings—1/1/15 (Chapman) ........ 58,500
(To convert parent company figures to equity method by recognizing
subsidiary's increase in book value for prior year [$80,000 net income
less $10,000 dividend declaration] and excess amortizations for that
period [$11,500])
Entry S
(To eliminate beginning of year stockholders' equity accounts of
subsidiary. The retained earnings balance has been adjusted for 2014
net income and dividends)
Entry A
Equipment ............................................................ 16,000
(To recognize allocations relating to investment—balances shown here
are as of the beginning of the current year [original allocation less
excess amortizations for the prior period])
Entry I
Dividend income .................................................. 30,000
Dividends declared ................................... 30,000
(To eliminate intra-entity dividend declarations recorded by parent as
income)
Entry E
Same as Entry E for 2014
22. (20 Minutes) (Consolidation entries for two years. Parent uses partial equity
method.)
Fair value allocation and annual excess amortizations:
Abernethy fair value (consideration paid) .................... $520,000
Excess amortization (indefinite life for goodwill) ......... -0-
Consolidation Entries as of December 31, 2014
Entry S
Common stock—Abernethy ................................ 250,000
Additional paid-in capital ..................................... 50,000
Retained earnings—Abernethy—1/1/14 ............. 100,000
Investment in Abernethy ................................. 400,000
(To eliminate stockholders' equity accounts of subsidiary)
Entry A
Equity in earnings of subsidiary.......................... 80,000
Investment in Abernethy ................................. 80,000
(To eliminate intra-entity income accrual for the current year based on
the parent's usage of the partial equity method)
Entry D
Investment in Abernethy ...................................... 10,000
Dividends declared .......................................... 10,000
(To eliminate intra-entity dividend transfers)
Entry S
Common stock—Abernethy................................. 250,000
Additional paid-in capital—Abernethy ............... 50,000
22. (continued)
(To eliminate beginning of year stockholders' equity accounts of
subsidiary—the retained earnings balance has been adjusted for 2014
income and dividends.)
Entry A
Goodwill ................................................................. 120,000
Investment in Abernethy ................................. 120,000
(To recognize original goodwill balance.)
Entry I
(To eliminate Intra-entity dividend transfers.)
Equity E—not needed
23. (45 Minutes) (Variety of questions about the three methods of recording an
Investment in a subsidiary for internal reporting purposes.)
a. Acquisition-Date Fair-Value Allocation and Annual Amortization:
Clay’s acquisition-date fair value ....... $510,000
Book value (assets minus liabilities
or stockholders' equity) ................. 450 ,000
Fair value in excess of book value ..... 60,000
Remaining Annual excess
Allocation to equipment based on....... life amortizations
EQUITY METHOD
Investment Income—2015:
Equity accrual (based on Clay's net income) ............... $60,000
23. (continued)
Investment in Clay—December 31, 2015:
Consideration transferred for Clay ................................ $510,000
2014:
2015:
Equity accrual (based on Clay's net Income)........... 60,000
Excess amortizations ................................................. (10,000)
INITIAL VALUE METHOD
Investment Income—2015:
Dividend income ............................................................. $8,000
Investment in Clay—December 31, 2015:
Consideration transferred for Clay ................................ $510 ,000
b. The reported consolidated balances are not affected by the parent’s
investment accounting method. Thus, consolidated expenses ($480,000
c. The reported consolidated balances are not affected by the parent’s
investment accounting method. Thus, consolidated equipment
the equity method or the initial value method is applied by Adams.
d. Adams retained earnings—Equity method
Adams retained earnings—1/1/14........................................ $860,000
Adams income 2014............................................................... 125,000
2014 equity accrual for Clay income.................................... 55,000
Adams retained earnings—Initial value method
Adams retained earnings—1/1/14........................................ $860,000
23. (continued)
e. EQUITY METHOD—Entry *C is not utilized since parent's retained
earnings balance is correct.
INITIAL VALUE METHOD—Entry *C is needed to recognize increase in
subsidiary's book value ($55,000 income less 5,000 dividends) and
amortization ($10,000) for prior year.
Investment in Clay ................................................ 40,000
Retained earnings, 1/1/15 (parent) ................. 40,000
f. Consolidated worksheet entry S for 2015:
Common stock (Clay) ..................................... 150,000
Retained earnings, 1/1/15 (Clay).................... 350,000
24. (15 Minutes) (Consolidated accounts one year after acquisition)
Stanza acquisition fair value ($10,000 in
stock issue costs reduce
Fair value in excess of book value ........... $200,000
Remaining
based on fair value ............................... 120 ,0006 yrs. $20,000
Goodwill ...................................................... $ 80 ,000 indefinite -0-
Total ........................................................ $20 ,000
Penske (book value) ........................................ $900,000
Stanza (book value) ......................................... 400,000
Allocation (above) ........................................... 120,000
24. (continued)
b. Consolidated net income, 2015
Revenues (add book values) .......................... $1,100,000
Expenses:
c. Consolidated retained earnings, 12/31/15
Stanza's retained earnings balance as of January 1, 2015, is not
d. Consolidated goodwill, 12/31/15
Allocation (above) ........................................... $80 ,000
