Question

On July 1, 2018, Truman Company acquired a 70 percent interest in Atlanta Company in exchange for consideration of $772,275 in cash and equity securities. The remaining 30 percent of Atlanta’s shares traded closely near an average price that totaled $330,975 both before and after Truman’s acquisition.

In reviewing its acquisition, Truman assigned a $132,000 fair value to a patent recently developed by Atlanta, even though it was not recorded within the financial records of the subsidiary. This patent is anticipated to have a remaining life of five years.

The following financial information is available for these two companies for 2018. In addition, the subsidiary’s income was earned uniformly throughout the year. The subsidiary declared dividends quarterly.

	Truman				Atlanta
Revenues	$	(801,490	)		$	(429,000	)
Operating expenses		454,000				304,000
Income of subsidiary		(34,510	)			0
Net income	$	(382,000	)		$	(125,000	)
Retained earnings, 1/1/18	$	(900,000	)		$	(537,000	)
Net income (above)		(382,000	)			(125,000	)
Dividends declared		175,000				80,000
Retained earnings, 12/31/18	$	(1,107,000	)		$	(582,000	)
Current assets	$	563,215			$	375,000
Investment in Atlanta		778,785				0
Land		460,000				242,000
Buildings		719,000				696,000
Total assets	$	2,521,000			$	1,313,000
Liabilities	$	(914,000	)		$	(411,000	)
Common stock		(95,000	)			(300,000	)
Additional paid-in capital		(405,000	)			(20,000	)
Retained earnings, 12/31/18		(1,107,000	)			(582,000	)
Total liabilities and stockholders' equity	$	(2,521,000	)		$	(1,313,000	)

1. How did Truman allocate Atlanta’s acquisition-date fair value to the various assets acquired and liabilities assumed in the combination?

2. How did Truman allocate the goodwill from the acquisition across the controlling and noncontrolling interests?

3. How did Truman derive the Investment in Atlanta account balance at the end of 2018?

4. Prepare a worksheet to consolidate the financial statements of these two companies as of December 31, 2018. At year-end, there were no intra-entity receivables or payables.

Answer 1

Ans. (a) Truman allocate Atlanta’s acquisition-date fair value to the various assets acquired and liabilities according to proceeding way given in table

Particulars	Amount in $	Time Period or remaining life in case of patents	Annual Excess Amortization
Consideration for exchange	772,275
Non-controlling interest fair value	330,975
Atlanta’s acquisition-date total fair value (i.e. 772,275 + 330,975)	1,103,250
Book value of Atlanta	875,600
Fair value in excess of book value (i.e. 875,600 + 227,650)	227,650
Excess fair value assigned Life Amortizations
Patent	132,000	5 years	26,400
Goodwill (i.e. 227,650 – 132,000)	95,650		0
Total			26,400

Calculations – 1. Patent = 132,000,     Remaining Life = 5 years

                              So, that 132,000/5 = 26,400 (per year)

                           2. Book Value of Atlanta = Total Assets – Liabilities – patent

                                                                        = 1,313,000 - 411,000 – 26,400 = 875,600

Ans. (b) - Truman allocate the goodwill from the acquisition across the controlling and non-controlling interests as

	Controlling Interest in $	Non-controlling interest in $
(a)Fair values at acquisition date	772,275	772,275
(b)Relative fair value of assets	705,320	302,280
Goodwill = (a) – (b)	66,955	469,995

Calculations- Net asset fair value = book value + patent

                                                          875,600 + 132,000 = $1,007,600

For controlling interest

                      Relative fair value of assets = 70% of $1,007,600

For non-controlling interest

                        Relative fair value of assets = 30% of $1,007,600

Ans. (c) Investment account balance at end of 2018

Particulars	Time Period	Amount in $
(a)Fair value at acquisition date	At July 2018	772,275
(b)Truman’s share of Atlanta’s net income (from July 2018 to Dec. 2018)	For 6 months	34,510
(c)Dividends	For 6 months	28,000
Investment balance at end of 2018 (i.e. (a) + (b) – (c))	Dec.,2018	778,785

     

Calculation – 1. Truman’s share of Atlanta’s net income (from July 2018 to Dec. 2018)

                          = (Net income of Atlanta – Annual Amortization) × half of year × 70%

                          = (125,000 – 26,400) × 0.5 × 70%

                          =98,600 × 0.5 × .70 = $34,510

                     2. Dividends

                          = Dividends declared by Atlanta × half of year × 70%

                          = 80000 × 0.5 × .70 = 28,000

                     3. Investment Balance

                           = Fair value at acquisition date + Truman’s share of Atlanta’s net income –Dividends

                           = 772,275 + 34,510 – 28,000 = 806,785 – 28000 = 778,785