Question

Patrick Corporation acquired 100 percent of O’Brien Company’s outstanding common stock on January 1, for $796,500 in cash. O’Brien reported net assets with a carrying amount of $448,000 at that time. Some of O’Brien’s assets either were unrecorded (having been internally developed) or had fair values that differed from book values as follows: Book Values Fair Values Trademarks (indefinite life) $ 102,000 $ 299,000 Customer relationships (5-year remaining life) 0 96,600 Equipment (10-year remaining life) 359,000 329,000 Any goodwill is considered to have an indefinite life with no impairment charges during the year. Following are financial statements at the end of the first year for these two companies prepared from their separately maintained accounting systems. O’Brien declared and paid dividends in the same period. Credit balances are indicated by parentheses. Patrick O'Brien Revenues $ (1,815,000 ) $ (856,000 ) Cost of goods sold 484,000 396,000 Depreciation expense 104,100 95,400 Amortization expense 28,200 0 Income from O'Brien (348,280 ) 0 Net income $ (1,546,980 ) $ (364,600 ) Retained earnings 1/1 $ (764,000 ) $ (312,000 ) Net income (1,546,980 ) (364,600 ) Dividends declared 154,000 92,000 Retained earnings 12/31 $ (2,156,980 ) $ (584,600 ) Cash $ 238,000 $ 121,000 Receivables 322,000 68,400 Inventory 202,000 168,000 Investment in O'Brien 1,016,780 0 Trademarks 518,000 79,800 Customer relationships 0 0 Equipment (net) 944,000 276,000 Goodwill 0 0 Total assets $ 3,240,780 $ 713,200 Liabilities $ (683,800 ) $ (28,600 ) Common stock (400,000 ) (100,000 ) Retained earnings 12/31 (2,156,980 ) (584,600 ) Total liabilities and equity $ (3,240,780 ) $ (713,200 ) Which investment method did Patrick use to compute the $348,280 income from O'Brien? Determine the totals to be reported for this business combination for the year ending December 31. Verify the totals determined in part (b) by producing a consolidation worksheet for Patrick and O’Brien for the year ending December 31. Patrick Corporation acquired 100 percent of O’Brien Company’s outstanding common stock on January 1, for $796,500 in cash. O’Brien reported net assets with a carrying amount of $448,000 at that time. Some of O’Brien’s assets either were unrecorded (having been internally developed) or had fair values that differed from book values as follows: Book Values Fair Values Trademarks (indefinite life) $ 102,000 $ 299,000 Customer relationships (5-year remaining life) 0 96,600 Equipment (10-year remaining life) 359,000 329,000 Any goodwill is considered to have an indefinite life with no impairment charges during the year. Following are financial statements at the end of the first year for these two companies prepared from their separately maintained accounting systems. O’Brien declared and paid dividends in the same period. Credit balances are indicated by parentheses. Patrick O'Brien Revenues $ (1,815,000 ) $ (856,000 ) Cost of goods sold 484,000 396,000 Depreciation expense 104,100 95,400 Amortization expense 28,200 0 Income from O'Brien (348,280 ) 0 Net income $ (1,546,980 ) $ (364,600 ) Retained earnings 1/1 $ (764,000 ) $ (312,000 ) Net income (1,546,980 ) (364,600 ) Dividends declared 154,000 92,000 Retained earnings 12/31 $ (2,156,980 ) $ (584,600 ) Cash $ 238,000 $ 121,000 Receivables 322,000 68,400 Inventory 202,000 168,000 Investment in O'Brien 1,016,780 0 Trademarks 518,000 79,800 Customer relationships 0 0 Equipment (net) 944,000 276,000 Goodwill 0 0 Total assets $ 3,240,780 $ 713,200 Liabilities $ (683,800 ) $ (28,600 ) Common stock (400,000 ) (100,000 ) Retained earnings 12/31 (2,156,980 ) (584,600 ) Total liabilities and equity $ (3,240,780 ) $ (713,200 ) Which investment method did Patrick use to compute the $348,280 income from O'Brien? Determine the totals to be reported for this business combination for the year ending December 31. Verify the totals determined in part (b) by producing a consolidation worksheet for Patrick and O’Brien for the year ending December 31. Patrick Corporation acquired 100 percent of O’Brien Company’s outstanding common stock on January 1, for $796,500 in cash. O’Brien reported net assets with a carrying amount of $448,000 at that time. Some of O’Brien’s assets either were unrecorded (having been internally developed) or had fair values that differed from book values as follows: Book Values Fair Values Trademarks (indefinite life) $ 102,000 $ 299,000 Customer relationships (5-year remaining life) 0 96,600 Equipment (10-year remaining life) 359,000 329,000 Any goodwill is considered to have an indefinite life with no impairment charges during the year. Following are financial statements at the end of the first year for these two companies prepared from their separately maintained accounting systems. O’Brien declared and paid dividends in the same period. Credit balances are indicated by parentheses. Patrick O'Brien Revenues $ (1,815,000 ) $ (856,000 ) Cost of goods sold 484,000 396,000 Depreciation expense 104,100 95,400 Amortization expense 28,200 0 Income from O'Brien (348,280 ) 0 Net income $ (1,546,980 ) $ (364,600 ) Retained earnings 1/1 $ (764,000 ) $ (312,000 ) Net income (1,546,980 ) (364,600 ) Dividends declared 154,000 92,000 Retained earnings 12/31 $ (2,156,980 ) $ (584,600 ) Cash $ 238,000 $ 121,000 Receivables 322,000 68,400 Inventory 202,000 168,000 Investment in O'Brien 1,016,780 0 Trademarks 518,000 79,800 Customer relationships 0 0 Equipment (net) 944,000 276,000 Goodwill 0 0 Total assets $ 3,240,780 $ 713,200 Liabilities $ (683,800 ) $ (28,600 ) Common stock (400,000 ) (100,000 ) Retained earnings 12/31 (2,156,980 ) (584,600 ) Total liabilities and equity $ (3,240,780 ) $ (713,200 ) Which investment method did Patrick use to compute the $348,280 income from O'Brien? Determine the totals to be reported for this business combination for the year ending December 31. Verify the totals determined in part (b) by producing a consolidation worksheet for Patrick and O’Brien for the year ending December 31. Patrick Corporation acquired 100 percent of O’Brien Company’s outstanding common stock on January 1, for $796,500 in cash. O’Brien reported net assets with a carrying amount of $448,000 at that time. Some of O’Brien’s assets either were unrecorded (having been internally developed) or had fair values that differed from book values as follows: Book Values Fair Values Trademarks (indefinite life) $ 102,000 $ 299,000 Customer relationships (5-year remaining life) 0 96,600 Equipment (10-year remaining life) 359,000 329,000 Any goodwill is considered to have an indefinite life with no impairment charges during the year. Following are financial statements at the end of the first year for these two companies prepared from their separately maintained accounting systems. O’Brien declared and paid dividends in the same period. Credit balances are indicated by parentheses. Patrick O'Brien Revenues $ (1,815,000 ) $ (856,000 ) Cost of goods sold 484,000 396,000 Depreciation expense 104,100 95,400 Amortization expense 28,200 0 Income from O'Brien (348,280 ) 0 Net income $ (1,546,980 ) $ (364,600 ) Retained earnings 1/1 $ (764,000 ) $ (312,000 ) Net income (1,546,980 ) (364,600 ) Dividends declared 154,000 92,000 Retained earnings 12/31 $ (2,156,980 ) $ (584,600 ) Cash $ 238,000 $ 121,000 Receivables 322,000 68,400 Inventory 202,000 168,000 Investment in O'Brien 1,016,780 0 Trademarks 518,000 79,800 Customer relationships 0 0 Equipment (net) 944,000 276,000 Goodwill 0 0 Total assets $ 3,240,780 $ 713,200 Liabilities $ (683,800 ) $ (28,600 ) Common stock (400,000 ) (100,000 ) Retained earnings 12/31 (2,156,980 ) (584,600 ) Total liabilities and equity $ (3,240,780 ) $ (713,200 ) Which investment method did Patrick use to compute the $348,280 income from O'Brien? Determine the totals to be reported for this business combination for the year ending December 31. Verify the totals determined in part (b) by producing a consolidation worksheet for Patrick and O’Brien for the year ending December 31. Patrick Corporation acquired 100 percent of O’Brien Company’s outstanding common stock on January 1, for $796,500 in cash. O’Brien reported net assets with a carrying amount of $448,000 at that time. Some of O’Brien’s assets either were unrecorded (having been internally developed) or had fair values that differed from book values as follows: Book Values Fair Values Trademarks (indefinite life) $ 102,000 $ 299,000 Customer relationships (5-year remaining life) 0 96,600 Equipment (10-year remaining life) 359,000 329,000 Any goodwill is considered to have an indefinite life with no impairment charges during the year. Following are financial statements at the end of the first year for these two companies prepared from their separately maintained accounting systems. O’Brien declared and paid dividends in the same period. Credit balances are indicated by parentheses. Patrick O'Brien Revenues $ (1,815,000 ) $ (856,000 ) Cost of goods sold 484,000 396,000 Depreciation expense 104,100 95,400 Amortization expense 28,200 0 Income from O'Brien (348,280 ) 0 Net income $ (1,546,980 ) $ (364,600 ) Retained earnings 1/1 $ (764,000 ) $ (312,000 ) Net income (1,546,980 ) (364,600 ) Dividends declared 154,000 92,000 Retained earnings 12/31 $ (2,156,980 ) $ (584,600 ) Cash $ 238,000 $ 121,000 Receivables 322,000 68,400 Inventory 202,000 168,000 Investment in O'Brien 1,016,780 0 Trademarks 518,000 79,800 Customer relationships 0 0 Equipment (net) 944,000 276,000 Goodwill 0 0 Total assets $ 3,240,780 $ 713,200 Liabilities $ (683,800 ) $ (28,600 ) Common stock (400,000 ) (100,000 ) Retained earnings 12/31 (2,156,980 ) (584,600 ) Total liabilities and equity $ (3,240,780 ) $ (713,200 ) Which investment method did Patrick use to compute the $348,280 income from O'Brien? Determine the totals to be reported for this business combination for the year ending December 31. Verify the totals determined in part (b) by producing a consolidation worksheet for Patrick and O’Brien for the year ending December 31.

Answer 1

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Part a
O’Brien acquisition-date fair value		$          796,500
O’Brien book value		$          448,000
Fair value in excess of book value		$          348,500
Allocation:			Life	Amortization
Trademarks		$          197,000	indefinite	$                 -
Customer relationships		$            96,600	5 yrs.	$        19,320
Equipment		$           -30,000	10 yrs.	$         -3,000
Goodwill		$            84,900	indefinite	$                 -
Total		$          348,500		$        16,320
100% of O'Brien Income Reported		$          364,600
Less: Amortization		$           -16,320
Net Income in Pattrick		$          348,280
Above calculation is made in EQUITY METHOD.
Part b
Revenues	$    2,671,000	the accounts of both companies combined
Cost of Goods Sold	$       880,000	the accounts of both companies combined
Depreciation Expense	$       196,500	the accounts for both companies and the acquisition-related depreciation adjustment of $3,000
Amortization Expense	$         47,520	the accounts of both companies and the acquisition-related adjustment of $19,320
Income of O’Brien	$                 -	the balance reported by the parent is removed and replaced with the subsidiary’s individual revenue and expense accounts
Net Income	$    1,546,980	consolidated revenues less expenses
Retained Earnings, 1/1	$       764,000	only the parent's retained earnings figure is included
Dividends Paid	$       154,000	the subsidiary's dividends were paid to the parent and, thus, as an intercompany transfer are eliminated
Retained Earnings, 12/31	$    2,156,980	the beginning balance for the parent plus consolidated net income less consolidated [parent] dividends
Cash	$       359,000	the accounts of both companies are added together
Receivables	$       390,400	the accounts of both companies are combined
Inventory	$       370,000	the accounts of both companies are combined
Investment in O’Brien	$                 -	the parent’s balance is removed and replaced with the subsidiary’s individual asset and liability accounts
Trademarks	$       794,800	the accounts of both companies are added together plus the 197,000 fair value adjustment
Customer relationships	$         77,280	the initial $96,600 fair value adjustment less $19,320 amortization expense
Equipment	$    1,193,000	both company’s balances less the $30,000 fair value adjustment net of $3,000 in depreciation expense reduction
Goodwill	$         84,900	the original allocation
Total Assets	$    3,269,380	summation of consolidated balances
Liabilities	$       712,400	the accounts of both companies are combined
Common Stock	$       400,000	parent balance only
Retained Earnings, 12/31	$    2,156,980	computed above
Total Liabilities and Equities	$    3,269,380	summation of consolidated balances
Part c
Accounts			Patrick	O’Brien	Debit		Credit		Consolidated
Revenues			$-1,815,000	$     -856,000					$ -2,671,000
Cost of goods sold			$     484,000	$      396,000					$      880,000
Depreciation expense			$     104,100	$        95,400			E	$    3,000	$      196,500
Amortization expense			$       28,200	$                 -	E	$ 19,320			$        47,520
Income of O’Brien			$   -348,280	$                 -	I	$348,280			$                 -
Net income			$-1,546,980	$     -364,600		$367,600		$    3,000	$ -1,546,980
Retained earnings, 1/1			$   -764,000	$     -312,000	S	$312,000			$     -764,000
Net income (above)			$-1,546,980	$     -364,600					$ -1,546,980
Dividends paid			$     154,000	$        92,000			D	$ 92,000	$      154,000
Retained earnings, 12/31			$-2,156,980	$     -584,600		$312,000		$ 92,000	$ -2,156,980
Cash			$     238,000	$      121,000					$      359,000
Receivables			$     322,000	$        68,400					$      390,400
Inventory			$     202,000	$      168,000					$      370,000
Investment in O’Brien			$ 1,016,780		D	$ 92,000	S	$412,000	$                 -
							A	$348,500
							I	$348,280
Trademarks			$     518,000	$        79,800	A	$197,000			$      794,800
Customer relationships			$               -	$                 -	A	$ 96,600	E	$ 19,320	$        77,280
Equipment (net)			$     944,000	$      276,000	E	$    3,000	A	$ 30,000	$   1,193,000
Goodwill			$               -	$                 -	A	$ 84,900			$        84,900
Total assets			$ 3,240,780	$      713,200					$   3,269,380
Liabilities			$   -683,800	$       -28,600					$     -712,400
Common stock			$   -400,000	$     -100,000	S	$100,000			$     -400,000
									$                 -
Retained earnings (above)			$-2,156,980	$     -584,600					$ -2,156,980
Total liabilities and equity			$-3,240,780	$     -713,200					$ -3,269,380