Father: acquisition method. Compute consolidated balances for a business combination

Extracted Content from Question Files:

4-32 Father, Inc., buys 80 percent of the outstanding common stock of Sam Corporation on January 1,
2009, for $680,000 cash. At the acquisition date, Sam’s total fair value was assessed at $850,000
although Sam’s book value was only $600,000. Also, several individual items on Sam’s financial records
had fair values that differed from their book values as follows:

Book Value Fair Value

Land…………………………………………… 60,000 225,000

Building and equipment

(10-year remaining life) …… 275,000 250,000

Copyright (20-year life)……………………. 100,000 200,000

Notes payable (due in 8 years)………… (130,000) (120,000)

For internal reporting purposes, Father, Inc., employs the equity method to account for this investment.
The following account balances are for the year ending December 31, 2009, for both companies. Using
the acquisition method, determine consolidated balances for this business combination (through either
individual computations or the use of a worksheet).

Father Sam

Revenues………………………………………. (1,360,000) (540,000)

Cost of Goods sold…………………………. 700,000 385,000

Depreciation expense…………………….. 260,000 10,000

Amortization expense…………………….. -0- 5,000

Interest expense…………………………….. 44,000 5,000

Equity in income of Sam…………………. (105,000) -0-

Net income………………………… (461,000) (135,000)

Retained earnings, 1/1/09……………… (1,265,000) (440,000)

Net income (above)………………………. (461,000) (135,000)

Dividends paid………………………………. 260,000 65,000

Retained earnings, 12/31/09………… (1,466,000) (510,000)

Current assets……………………………….. 965,000 528,000
Investment in Sam…………………………… 733,000 -0-

Land………………………………………………….. 292,000 60,000

Buildings and Equipment (Net)……….. 877,000 265,000

Copyright……………………………………….. -0- 95,000

Total assets………………………… 2,867,000 948,000

Accounts payable…………………………… (191,000) (148,00)

Notes payable……………………………….. (460,000) (130,000)

Common stock…………………………….. (300,000) (100,000)

Additional Paid-in-capital………………… (450,000) (60,000)

Retained earnings (above)………………… (1,466,000) (510,000)

Total liabilities and equities… (2,867,000) (948,000)

Given Data P04-32

Sam Corporation outstanding common stock 80%
acquired by Father, Inc.
Cash paid by Father, Inc. for $ 680,000
Sam Corporation shares
Book value of Sam Corporation 600,000
Use this template to complete
Sam accounts values on 1/1/09
Book Fair Step 1: Complete purchase price allocation
Value Value Step 2: Complete Journal Entries on Tab 4-3
Land $ 60,000 $ 225,000 Step 3: Input journal entries into Tab 4-32 co
Buildings and equipment 275,000 250,000 Step 4: Complete consolidated totals on Tab
(10-year remaining life)
Copyright (20-year life) 100,000 200,000
Notes payable (due in 8 years) 130,000 120,000

Father, Sam
Inc. Corporation
12/31/2009 12/31/2009
Revenues $ (1,360,000) $ (540,000)
Cost of goods sold 700,000 385,000
Depreciation expense 260,000 10,000
Amortization expense - 5,000
Interest expense 44,000 5,000
Equity in income of Sam (105,000) -
Net income $ (461,000) $ (135,000)

Retained earnings, 1/1/0 (1,265,000) (440,000)
Net income (461,000) (135,000)
Dividends paid 260,000 65,000
Retained earnings, 12/31/09 $ (1,466,000) $ (510,000)

Current assets $ 965,000 $ 528,000
Investment in Sam 733,000 -
Land 292,000 60,000
Buildings and equipment (net) 877,000 265,000
Copyright - 95,000
Total assets $ 2,867,000 $ 948,000

Accounts payable $ (191,000) $ (148,000)
Notes payable (460,000) (130,000)
Common stock (300,000) (100,000)
Additional paid-in capital (450,000) (60,000)
Retained earnings (1,466,000) (510,000)
Total liabilities and equity $ (2,867,000) $ (948,000)

Note: Credits are indicated by parentheses.
this template to complete the Problem 4-32 based upon the 3 step approach below:

1: Complete purchase price allocation on Tab 4-32
2: Complete Journal Entries on Tab 4-32 Journal Entries
3: Input journal entries into Tab 4-32 consolidation worksheet
4: Complete consolidated totals on Tab 4-32
Journal Entries to Record Consolidation

"S" Entry
DR CR

Retained Earnings
Common Stock
APIC
Inv. In Sam
NCI

- -

Elimination of the subsidiary's stockholder's equity accounts.

"A" Entry

Land
Copyright
Notes Payable
Investment in Sam
Buildings & Equipment
NCI

- -

Allocation of subsidiary total fair value in excess of book value

"I" Entry

Equity in Income
Investment in Sam

- -

Elimination of intercompany income (equity accrual less amortization expenses)

"D" Entry

Investment in Sam
Dividends Paid

- -

Elimination of intercompany dividend payments.

"E" Entry
Amortization Expense
Interest Expense
Buildings & Equipment
Depreciation Expense
Copyright
Notes Payable

- -

Recognition of amortization expenses on fair-value allocations.

- -
Student Name:
Class:
Problem 04-32

FATHER, INC. AND SAM CORPORATION

- Purchase price allocation and annual amortization

Acqisition-date subsidiary fair value
Book value of subsidiary
Fair value in excess of book value

Allocations to specific accounts based on difference
between fair value and book value:
Land
Buildings and equipment
Copyright
Notes payable
Total

Life Excess
Annual excess amortizations: (years) Amortizations
Buildings and equipment
Copyright
Notes payable
Total
Student Name:
Class:
Problem 04-32

Totals for the business combination for the year ending December 31, 2006
FATHER, INC. AND SAM CORPORATION

Account Name Balance Explanation
Revenues

Cost of goods sold

Depreciation expense

Amortization expense

Interest expense

Equity in income of Sam

Net income

Retained earnings, 1/1

Noncontrolling interest in income
of subsidiary

Dividends paid

Retained earnings, 12/31

Current assets

Investment in Sam

Land

Buildings and equipment (net)

Copyright

Total assets

Accounts payable

Notes payable

Noncontrolling interest in Sam

Common stock

Additional paid-in capital

Retained earnings, 12/31
Student Name:
Class:
Problem 04-32

Total liabilities & equities
Student Name:
Class:
Problem 04-32

FATHER, INC. AND SAM CORPORATION
Consolidation Worksheet
Non-
Father, Sam Consolidation Entries controlling Consolidated
Accounts Inc. Corporation Debit Credit Interest Totals
Revenues $ (1,360,000) $ (540,000)
Cost of goods sold 700,000 385,000
Depreciation expense 260,000 10,000
Amortization expense - 5,000
Interest expense 44,000 5,000
Equity in income of Sam (105,000) -
Separate company net income $ (461,000) $ (135,000)
Consolidated net income

Noncontrolling interest in Sam's income
Controlling interest in CNI

Retained earnings, 1/1 $ (1,265,000) $ (440,000)
Net income (461,000) (135,000)
Dividends paid 260,000 65,000
Retained earnings, 12/31 $ (1,466,000) $ (510,000)

Current assets $ 965,000 $ 528,000
Investment in Sam 733,000 -

Land 292,000 60,000
Buildings and equipment (net) 877,000 265,000
Copyright - 95,000
T otal assets $ 2,867,000 $ 948,000

Accounts payable (191,000) (148,000)
Notes payable (460,000) (130,000)
NCI in Sam 1/1
NCI in Sam 12/31
Common stock (300,000) (100,000)
Additional paid-in capital (450,000) (60,000)
Retained earnings, 12/31 (1,466,000) (510,000)
T otal liabilities and equity $ (2,867,000) $ (948,000)

Parentheses indicate a credit balance.