Question

Following are the individual financial statements for Gibson and Davis for the year ending December 31, 2018:

	Gibson				Davis
Sales	$	(847,000	)		$	(470,000	)
Cost of goods sold		390,000				207,000
Operating expenses		271,000				77,000
Dividend income		(24,000	)			0
Net income	$	(210,000	)		$	(186,000	)
Retained earnings, 1/1/18	$	(753,000	)		$	(491,000	)
Net income		(210,000	)			(186,000	)
Dividends declared		80,000				40,000
Retained earnings, 12/31/18	$	(883,000	)		$	(637,000	)
Cash and receivables	$	254,100			$	83,000
Inventory		544,000				310,000
Investment in Davis		603,900				0
Buildings (net)		536,000				680,000
Equipment (net)		408,000				445,000
Total assets	$	2,346,000			$	1,518,000
Liabilities	$	(833,000	)		$	(541,000	)
Common stock		(630,000	)			(340,000	)
Retained earnings, 12/31/18		(883,000	)			(637,000	)
Total liabilities and stockholders' equity	$	(2,346,000	)		$	(1,518,000	)

Gibson acquired 60 percent of Davis on April 1, 2018, for $603,900. On that date, equipment owned by Davis (with a five-year remaining life) was overvalued by $84,000. Also on that date, the fair value of the 40 percent noncontrolling interest was $402,600. Davis earned income evenly during the year but declared the $40,000 dividend on November 1, 2018.

1. Prepare a consolidated income statement for the year ending December 31, 2018.

2. Determine the consolidated balance for each of the following accounts as of December 31, 2018:

• Goodwill
• Equipment (net)
• Common stock
• Buildings (net)
• Dividends declared

Answer 1

ANSWER 1:-

Consolidated Income Statement

Revenue		1199500
Cost of goods sold	545250
Operating Expenses	316150	861400
Consolidated Income		338100
Non controlling interest in CNI		60840
Controlling interest in CNI		277260

Revenue = $1317000 - (470000 * 25%) =   $1317000 - $117500 = $1199500

Cost of goods sold = $597000 combined COGS less $51750 (25% * 207000) = 545250

Excess overvalued equipment annual depreciation = 84000 / 5 = 16800

nine month excess overvalued equipment depreciation = (16800 / 12) * 9 = 12600

Operating Expenses = [$348000 combined operating expenses] less [$19250 (25% * 77000) ] less [nine month excess overvalued equipment depreciation reduction of $12600]

Net Income attributable to non controlling interest = 40% of post-acquisition subsidiary net income less excess amortization = 40%( [186000 *9/12] + 12600) = 60840

Answer 2:-

Goodwill = $213000

book value = 491000 + 340000 + 25% * 186000 = 877500

fair value = 603900 + 402600 = 1006500

goodwill = 1006500 - 877500 + 84000 = 213000

Equipment = 408000 + 445000 - 84000 + 12600 = $781600

Common Stock = $630,000 [ Balance of parent company only]

Building = 536000 + 680000 = $1,216,000

Dividends Declared = $80000 [ Balance of parent company only]

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