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.
To Prepare:
Consolidated worksheet as of December 31, 2015.
Answer to Problem 2.14.2P
Company P and Company S | ||||||
Consolidation Worksheet | ||||||
Year ending December 31, 2015 | ||||||
Balance Sheet | Company P | Company S | Debit | Credit | NCI | Consolidated Balances |
Cash | $20,000 | $20,000 | ||||
$300,000 | $50,000 | $350,000 | ||||
Inventory | $410,000 | $120,000 | $20,000 | $510,000 | ||
Investment in Company P | $950,000 | $272,000 | ||||
$678,000 | ||||||
Land | $800,000 | $100,000 | $100,000 | $1,000,000 | ||
Building | $2,800,000 | $300,000 | $200,000 | $3,300,000 | ||
($500,000) | ($100,000) | ($600,000) | ||||
Equipment | $600,000 | $140,000 | $110,000 | $850,000 | ||
Accumulated depreciation | ($230,000) | ($50,000) | ($280,000) | |||
Patents | $10,000 | $140,000 | $150,000 | |||
Computer software | $50,000 | $50,000 | ||||
$60,000 | $277,500 | $337,500 | ||||
Current liabilities | ($150,000) | ($90,000) | ($240,000) | |||
Bonds payable | ($300,000) | ($200,000) | ($500,000) | |||
Premium on Bonds payable | $10,000 | ($10,000) | ||||
Common stock (Company S) | ($10,000) | $8,000 | ($2,000) | $0 | ||
Paid-in capital in excess of par (Company S) | ($190,000) | $152,000 | ($38,000) | $0 | ||
($140,000) | $112,000 | $169,500 | ($197,500) | $0 | ||
Common stock (Company P) | ($92,000) | ($92,000) | ||||
Paid-in capital in excess of par (Company P) | ($3,508,000) | ($3,508,000) | ||||
Retained earnings (Company P) | ($1,100,000) | ($1,100,000) | ||||
Non-controlling interest | $0 | |||||
Totals | $0 | $0 | $1,149,500 | $1,149,500 | $237,500 | $237,500 |
Table: (1)
Explanation of Solution
Company P and Company S | ||||||
Consolidation Worksheet | ||||||
Year ending December 31, 2015 | ||||||
Balance Sheet | Company P | Company S | Debit | Credit | NCI | Consolidated Balances |
Cash | $20,000 | $20,000 | ||||
Accounts receivable | $300,000 | $50,000 | $350,000 | |||
Inventory | $410,000 | $120,000 | $20,000 | $510,000 | ||
Investment in Company P | $950,000 | $272,000 | ||||
$678,000 | ||||||
Land | $800,000 | $100,000 | $100,000 | $1,000,000 | ||
Building | $2,800,000 | $300,000 | $200,000 | $3,300,000 | ||
Accumulated depreciation | ($500,000) | ($100,000) | ($600,000) | |||
Equipment | $600,000 | $140,000 | $110,000 | $850,000 | ||
Accumulated depreciation | ($230,000) | ($50,000) | ($280,000) | |||
Patents | $10,000 | $140,000 | $150,000 | |||
Computer software | $50,000 | $50,000 | ||||
Goodwill | $60,000 | $277,500 | $337,500 | |||
Current liabilities | ($150,000) | ($90,000) | ($240,000) | |||
Bonds payable | ($300,000) | ($200,000) | ($500,000) | |||
Premium on Bonds payable | $10,000 | ($10,000) | ||||
Common stock (Company S) | ($10,000) | $8,000 | ($2,000) | $0 | ||
Paid-in capital in excess of par (Company S) | ($190,000) | $152,000 | ($38,000) | $0 | ||
Retained earnings (Company S) | ($140,000) | $112,000 | $169,500 | ($197,500) | $0 | |
Common stock (Company P) | ($92,000) | ($92,000) | ||||
Paid-in capital in excess of par (Company P) | ($3,508,000) | ($3,508,000) | ||||
Retained earnings (Company P) | ($1,100,000) | ($1,100,000) | ||||
Non-controlling interest | $0 | |||||
Totals | $0 | $0 | $1,149,500 | $1,149,500 | $237,500 | $237,500 |
Table: (1)
Working note 1:
Value Analysis schedule:
Value analysis schedule | Company-Implied fair value | Parent price (80%) | Non-controlling interest value (20%) |
Fair value of subsidiary | $1,187,500 | $950,000 | $237,500 |
Fair value of net assets excluding goodwill | $850,000 | $680,000 | $170,000 |
Gain on acquisition | $337,500 | $270,000 | $67,500 |
Table: (2)
Working note 2:
Determination and distribution of excess schedule:
Determination and distribution of excess schedule | ||||
Particulars | Company Implied fair value | Parent price (80%) | Non-controlling interest value (20%) | |
Fair value of subsidiary (a) | $1,187,500(5) | $950,000 | $237,500 | |
Book value of interest acquired | ||||
Common stock | $10,000 | |||
Paid-in capital in excess of par | $190,000 | |||
Retained earnings | $140,000 | |||
Total equity | $340,000 | $340,000 | $340,000 | |
Interest acquired | 80% | 20% | ||
Book value (b) | $340,000 | $272,000 | $68,000 | |
Excess of fair value over book value [c] = (a) - (b) | $847,500 | $678,000 | $169,500 | |
Adjustment of identifiable accounts | Adjustment | Life | Amortization per year | Worksheet key |
Increase in inventory value | ($20,000) | Debit (D) 1 | ||
Increase in land value | $100,000 | Debit (D) 2 | ||
Increase in building | $200,000 | Debit (D) 3 | ||
Increase in equipment | $110,000 | Debit (D) 4 | ||
Increase in patents | $140,000 | Debit (D) 5 | ||
Increase in computer software | $50,000 | Debit (D) 6 | ||
Premium on bonds payable | ($10,000) | Credit (D) 7 | ||
Goodwill | $277,500 | Credit (D) 8 | ||
Total | $847,500 |
Table: (3)
Working note 3:
Compute the fair value of the net assets of Company S:
Particulars | Amount |
Total assets: | |
Accounts receivable | $50,000 |
Inventory | $100,000 |
Land | $200,000 |
Building | $400,000 |
Equipment | $200,000 |
Patent | $150,000 |
Computer software | $50,000 |
Total liabilities: | |
Current liabilities | ($90,000) |
Bonds payable | ($210,000) |
Total fair value of net assets of Company S | $850,000 |
Table: (4)
Working note 4:
Compute the amount of consideration:
Working note 5:
Compute the fair value of subsidiary:
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