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25. (30 Minutes) (Consolidated balances three years after the date of
acquisition. Includes questions about parent's method of recording
investment for internal reporting purposes.)
a. Acquisition-Date Fair Value Allocation and Amortization:
Consideration transferred 1/1/13 .............. $600,000
Book value (given) ..................................... (470 ,000)
Fair value in excess of book value ..... 130,000
Annual
CONSOLIDATED BALANCES
Depreciation expense = $659,000 (book values plus $9,000 excess
depreciation)
25. (continued)
Buildings = $1,200,000 (add book values)
b. The parent's choice of an investment method has no impact on the
c. The initial value method is used. The parent's Investment in Subsidiary
d. If the partial equity method had been utilized, the investment income
account would have shown an equity accrual of $100,000. If the equity
e. Initial value method—Foxx’s retained earnings—1/1/15
Foxx’s 1/1/15 balance (initial value method was employed) $1 ,100,000
Partial equity method—Foxx’s retained earnings—1/1/15
Foxx’s 1/1/15 balance (initial value method)....................... $1,100,000
2013 net equity accrual for Greenburg ($90,000 – $20,000). 70,000
Equity method—Foxx’s retained earnings—1/1/15
Foxx’s 1/1/15 balance (initial value method)....................... $1,100,000
2013 net equity accrual for Greenburg ($90,000 – $20,000). 70,000
26. (50 Minutes) (Consolidated totals for an acquisition where parent employs
the equity method. Worksheet is produced as a separate requirement.)
a. Sea Cliff acquisition-date fair value .................... $6,000,000
Sea Cliff book value .............................................. (2 ,500,000)
Fair value in excess of book value ..................... $3 ,500,000
Excess assigned to specific Annual
accounts based on fair value Remaining excess
life amortization
Computer software................ $1,200,000 12 yrs. $100,000
b. Equity earnings in Sea Cliff:
Because Persoff uses the equity method, the $575,000 "Equity earnings
c. Investment in Sea Cliff:
Fair value at 1/1/13................................................................... $6,000,000
Persoff's equity in Sea Cliff earnings (net of amortization):
2013.................................................................... $500,000
2014.................................................................... 540,000
26. continued (part d.)
PERSOFF COMPANY AND CONSOLIDATED SUBSIDIARY
Consolidation Worksheet
For Year Ending December 31, 2015
Income Statement Persoff Sea Cliff Adjustments & Eliminations Consolidated
Net income (1,300,000) (975,000) (1,300,000)
Statement of Retained Earnings
Retained earnings 1/1 (7,470,000) (3,240,000) S 3,240,000 (7,470,000)
Net income (above) (1,300,000) (975,000) (1,300,000)
Dividends declared 600,000 150,000 150,000 D 600,000
2,700,000 A
Computer software 300,000 45,000 A 1,000,000 100,000 E 1,245,000
Patented technology 800,000 80,000 A 1,500,000 300,000 E 2,080,000
Goodwill 100,000 0 A 200,000 300,000
Equipment 1,835,000 4,500,000 6,335,000
27. (50 Minutes) (Consolidated totals for an acquisition where parent employs
the equity method. Worksheet is produced as a separate requirement.)
a. Osprey acquisition-date fair value ...................... $2,017,000
Osprey book value ................................................ (1 ,550,000)
Fair value in excess of book value ..................... $467 ,000
Trademark................................ 50,000indefinite -0-
Goodwill .................................. 137 ,000 indefinite -0-
Total ......................................... $467 ,000 $55 ,000
b. Investment in Osprey:
Fair value at 1/1/14................................................................... $2,017,000
Investment balance at 12/31/15.............................................. $2 ,390,000
P 27 (continued) part d. PEREGRINE COMPANY AND CONSOLIDATED SUBSIDIARY
Consolidation Worksheet
For Year Ending December 31, 2015
Income Statement Peregrine Osprey Adjustments & Eliminations Consolidated
Net income (1,625,000) (378,000) (1,625,000)
Statement of Retained Earnings
Retained earnings 1/1 (2,900,000) (900,000) S 900,000 (2,900,000)
Net income (1,625,000) (378,000) (1,625,000)
Dividends declared 150,000 45,000 45,000 D 150,000
Investment in Osprey 2,390,000 -0- D 45,000 1,700,000 S -0-
412,000 A
323,000 I
Equipment (net) 6,000,000 1,400,000 A 105,000 15,000 E 7,490,000
Customer lists 115,000 -0- A 120,000 40,000 E 195,000
Common stock - Peregrine (7,000,000) (7,000,000)
Common stock - Osprey (800,000) S 800,000
Retained earnings 12/31 (4,375,000) (1,233,000) (4,375,000)
Total liabilities and SE (13,200,000) (2,833,000) 2,535,000 2,535,000 (14,000,000)
28. (50 Minutes) (Consolidated totals for an acquisition. Worksheet is
produced as a separate requirement.)
a. O’Brien acquisition-date fair value ..................... $550,000
O’Brien book value ............................................... (350 ,000)
Fair value in excess of book value ..................... $200 ,000
Equipment ................................. (30,000) 10 yrs. (3,000)
Goodwill .................................... 55 ,000 indefinite -0-
Total ........................................... $200 ,000 $12 ,000
If the partial equity method were in use, the Income of O’Brien account would
have had a balance of $222,000 (100% of O’Brien's reported income for the
b. Students can develop consolidated figures conceptually, without relying on a
worksheet or consolidation entries. Thus, part b. asks students to determine
independently each balance to be reported by the business combination.
Revenues = $1,645,000 (the accounts of both companies combined)
Cost of goods sold = 528,000 (the accounts of both companies combined)
Net Income = 935,000 (consolidated revenues less expenses)
Retained earnings, 1/1 = $700,000 (only the parent's retained earnings
figure is included)
28. (continued)
Cash = $290,000 (the accounts of both companies are added together)
Receivables = $281,000 (the accounts of both companies are combined)
Inventory = $310,000 (the accounts of both companies are combined)
28. (Continued)
c. PATRICK COMPANY AND CONSOLIDATED SUBSIDIARY
Consolidation Worksheet
For Year Ending December 31
Consolidation Entries Consolidated
Accounts Patrick O’Brien Debit Credit Totals
Revenues (1,125,000) (520,000) (1,645,000)
Retained earnings, 1/1 (700,000) (250,000) (S)250,000 (700,000)
Net income (above) (935,000) (222,000) (935,000)
Dividends declared 142 ,000 80 ,000 (D) 80,000 142 ,000
(A) 200,000 -0-
(I) 210,000
Trademarks 474,000 60,000 (A) 100,000 634,000
Customer relationships -0- -0- (A) 75,000 (E) 15,000 60,000
Equipment (net) 925,000 272,000 (E) 3,000 (A) 30,000 1,170,000
Total liabilities and equity (2 ,664,000) (628 ,000) 888,000 888,000 (2 ,800,000)
29. (60 Minutes) (Consolidation worksheet five years after acquisition with
parent using initial value method. Effects of using equity method also
included)
Acquisition-date fair value allocation and annual amortization:
a. Aaron fair value (stock exchanged
Excess fair value over book value ........ $110 ,000
Excess assigned to specific
accounts based on fair values Remaining Annual excess
life
amortizations
Royalty agreements $ 60,000 6 yrs. $10,000
Trademark 50 ,000 10 yrs. 5 ,000
Total $110 ,000 $15 ,000
The parent company is apparently applying the initial value method:
only dividend income is recognized during the current year and the
Aaron's retained earnings January 1, 2015 ........................ $490,000
Retained earnings at acquisition-date ................................ (230 ,000)
Increase since acquisition-date ........................................... $260,000
Explanations of consolidation worksheet entries
Entry*C: Converts 1/1/15 figures from initial value method to equity
method as per computation above.
Entry S: Eliminates stockholders' equity accounts of subsidiary as of
the beginning of current year.
See next page for worksheet.
29. a. (continued)
MICHAEL COMPANY AND CONSOLIDATED SUBSIDIARY
Consolidation Worksheet
For Year Ending December 31, 2015
Consolidation Entries Consolidated
Accounts Michael Aaron Debit Credit Totals
Revenues (610,000) (370,000) (980,000)
Cost of goods sold 270,000 140,000 410,000
Amortization expense 115,000 80,000 (E) 15,000 210,000
Retained earnings 1/1 (880,000) (*C) 200,000 (1,080,000)
(490,000)(S) 490,000 -0-
Net income (above) (230,000) (150,000) (360,000)
Dividends declared 90 ,000 5 ,000 (I) 5,000 90 ,000
(A) 50,000
Royalty agreements 920,000 380,000 (A) 20,000 (E) 10,000 1,310,000
Trademark - 0 - - 0 -(A) 30,000 (E) 5,000 25 ,000
Total assets 2 ,900,000 1 ,235,000 3 ,700,000
Total liabilities and equity (2 ,900,000) (1 ,235,000)890,000 890,000 (3 ,700,000)
Parentheses indicate a credit balance.
29. (continued)
b. If the equity method had been applied by Michael, three figures on that
company's financial records would be different: Equity in Earnings of
Aaron, Retained Earnings—1/1/15, and Investment in Aaron Co.
Equity in earnings of Aaron: $135,000 (the parent would accrue 100% of
Aaron's $150,000 income but must also recognize $15,000 in
amortization expense.)
c. No Entry *C is needed on the worksheet if the equity method is applied.
Both the investment account as well as beginning retained earnings
would be stated appropriately.
d. Consolidated figures are not affected by the investment method used by
