Advanced Accounting
Advanced Accounting
12th Edition
ISBN: 9781305084858
Author: Paul M. Fischer, William J. Tayler, Rita H. Cheng
Publisher: Cengage Learning
Question
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Chapter 4, Problem 4.14.2P
To determine

Business combination:

Business combination refers to the 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.

:

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

Expert Solution & Answer
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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 BalanceAdjustments    
    ParticularsCompany PCompany SDebitCreditConsolidated incomeNCIRetained earningsConsolidated Balances
    Cash$195,400 $53,500      $248,900
    Accounts receivable$140,000 $53,000  $14,000 (IA)    $179,000
    Inventory$140,000 $81,000  $11,000 (EI)    $210,000
    Land$100,000 $60,000      $160,000
    Investment in Company S$443,600   $64,000 (CY1)     
       $8,000 (CY2)      
        $215,600     
        $172,000 (D)    $0
    Building$800,000 $150,000 $100,000     $1,050,000
    Accumulated Depreciation($280,000)($65,000) $15,000    ($360,000)
    Equipment$150,000 $220,000 $50,000 $64,000    $356,000
    Accumulated Depreciation($115,000)($103,000) $30,000     
       $14,000      
       $9,000     ($225,000)
    Goodwill $40,000 $65,000     $105,000
    Accounts payable($25,000)($50,000)$14,000     ($61,000)
    Bonds payable ($100,000)     ($100,000)
    Common stock (Company S) ($10,000)$8,000   ($2,000)  
    Paid-in capital in excess of par (Company S) ($90,000)$72,000   ($18,000)  
    Retained earnings (Company S) ($169,500)$135,600 $43,000 (NCI)     
       $6,000      
       $4,000     
       $960 (BI)   ($65,940)  
    Common stock (Company P)($100,000)      ($100,000)
    Paid-in capital in excess of par (Company P)($800,000)      ($800,000)
    Retained earnings (Company P)($510,000) $24,000      
       $8,040      
       $46,000    ($431,960) 
    Sales($850,000)($500,000)$90,000  ($1,260,000)   
    Cost of goods sold$480,000 $290,000  $90,000 (IS)     
       $11,000 $9,000 (BI) $682,000    
    Depreciation expense: Building$30,000 $5,000 $5,000  $40,000    
    Depreciation expense: Equipment$15,000 $23,000 $10,000      
        $9,000 $39,000    
    Other expenses$210,000 $94,000   $304,000    
    Interest expense $8,000   $8,000    
    Subsidiary income($64,000) $64,000 (CY1)      
    Dividend declared, Company S $10,000  $8,000 (CY2)  $2,000   
    Dividend declared, Company P$40,000      $40,000  
     $0 $0 $744,600 $744,600     
    Consolidated net income    ($187,000)  $0
    NCI     $ 13,360 ($13,360)  
    Controlling interest    ($173,640) ($173,640) 
    Total NCI     ($97,300) ($97,300)
    Retained earnings of Controlling Interest      ($565,600)$565,600

  Table: (1)

    Income Distribution Schedule of Company S
    ParticularsAmount
    Net income (internally generated)$ 80,000
    Less: Amortization$ (15,000)
    Less: Unrealized profit in ending inventory$ (7,000)
    Less: Gain on equipment$ 4,000
    Add: Profit realized in beginning inventory$ 4,800
    Adjusted income$ 66,800
    Non-controlling share of Company S$ 13,360

  Table: (2)

    Income Distribution Schedule of Company P
    Particulars Amount
    Net income (internally generated) $ 115,000
    Share in the adjusted income of Company S $ 53,440
    Add: Profit realized on beginning inventory $ 4,200
    Add: Gain realized in current year $ 5,000
    Less: Unrealized gain on ending inventory $ (4,000)
    Controlling share of Company P $ 173,640

  Table: (3)

Working note 1:

    Particulars Amount PeriodsAmortization
    Building$100,000 20$5,000
    Equipment$50,000 5$10,000
    Goodwill$65,000   
    Total adjustments$215,000   

  Table: (4)

Working note 2:

    Particulars Annual amortizationCurrent yearPrior yearsTotal
    Building$5,000 $5,000 $5,000 $10,000
    Equipment$10,000 $10,000 $10,000 $20,000
    Total$15,000 $15,000 $15,000 $30,000
    Particulars Annual amortizationCurrent yearPrior yearsTotal
    Building$5,000 $5,000 $5,000 $10,000
    Equipment$10,000 $10,000 $10,000 $20,000
    Total$15,000 $15,000 $15,000 $30,000

  Table: (5)

Working note 3:

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.

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