On January 1, 2006, (JDE) bought a 55% interest in Bubba Manufacturing, Inc. (BMI). JDE paid for
the transaction with $3.5 million cash and 400,000 shares of JDE common stock (par value $1.00 per share). At the time
of the acquisition, BMI's book value was $16,970,000.
On January 1, JDE stock had a market value of $17.25 per share. Any cost over book value is assigned to goodwill,
which is not amortized. BMI had the following balances on January 1, 2006.
For internal reporting purposes, JDE employed the equity method to account for this investment.
Land 1,700,000 2,550,000
Buildings (seven-year remaining life) 2,700,000 3,400,000
Equipment (five-year remaining life) 3,700,000 3,300,000
The following account balances are for the year ending December 31, 2006 for both companies.
John Doe Bubba ELIMINATIONS CONSOLIDATED
Enterprises Manufacturing RE DEBITS RE CREDITS NC INTEREST TOTALS
Revenues (298,000,000) (103,750,000)
Expenses 271,000,000 95,800,000
Equity in income of Bubba Manufacturing (4,361,500) -
Non controlling interest in income
Net income (31,361,500) (7,950,000)
Retained earnings, January 1, 2006 (2,450,000) (100,000)
Net income (above) (31,361,500) (7,950,000)
Dividends paid 5,000,000 3,000,000
Retained earnings, December 31, 2006 (28,811,500) (5,050,000)
Current Assets 30,500,000 20,800,000
Investment in Bubba Manufacturing 13,111,500
Land 1,500,000 1,700,000
Buildings 5,600,000 2,360,000
Equipment (net) 3,100,000 2,960,000
Total assets 53,811,500 27,820,000
Accounts payable (3,100,000) (4,900,000)
Notes payable (1,000,000)
Non controlling interest
Common stock (2,900,000) (6,000,000)
Additional paid-in capital (19,000,000) (10,870,000)
Retained earnings, Dec. 31, 2006 (above) (28,811,500) (5,050,000)
Total liabilities and stockholders' equity (53,811,500) (27,820,000)
A. Prepare a schedule to determine the amortization and allocation amounts.
B. Prepare a consolidation worksheet for this business combination. Assume goodwill has been reviewed and there is
no goodwill impairment. Show the eliminations on the worksheet above. Insert any additional
accounts on the worksheet that are needed.
C. As of the acquisition date what value would be assigned to the land, buildings, equipment, goodwill
and non-controlling interest under the Economic and Proportionate Consolidation Concepts?
This assignment is quite similar to the previous two consolidation questions worked. What makes it different however, and a bit more challenging is the fact that the noncontrolling interest in the subsidiary has to be taken into consideration when preparing the elimination entries. You will notice in section B of the adjusted excel file attached that entries A, I, D and E basically remains the same. However, entry S has been slightly changed to take the non-controlling interest into consideration. Note the following excerpt taken from Advanced Accounting by Hoyle et al, 6th Ed.
"If consolidated financial statements are prepared on the date of acquisition and there is a noncontrolling interest, Consolidation Entry S will reflect the allocation of the subsidiary's equity accounts at book value between the noncontrolling interest and the parent's investment. Consolidation Entry A would not be affected by the existence of a noncontrolling interest. Only the parent's share of the difference between the book value and the fair market value is recognized. Similarly, subsequent to the date of ...
This solution, after giving detailed information that relates to issues within the question, provides you with a schedule of the amortization and allocation amounts. A consolidation worksheet for this business combination is given in the solution and also the value that should be assigned to the land, buildings, equipment, goodwill and non-controlling interest under the Economic and Proportionate Consolidation Concepts. All references are provided.