Question

Padre, Inc., buys 80 percent of the outstanding common stock of Sierra Corporation on January 1, 2018, for $771,200 cash. At the acquisition date, Sierra’s total fair value, including the noncontrolling interest, was assessed at $964,000 although Sierra’s book value was only $614,000. Also, several individual items on Sierra’s financial records had fair values that differed from their book values as follows:

	Book Value				Fair Value
Land	$	65,900			$	280,900
Buildings and equipment (10-year remaining life)		345,000				306,000
Copyright (20-year remaining life)		143,000				299,000
Notes payable (due in 8 years)		(211,000	)			(193,000	)

For internal reporting purposes, Padre, Inc., employs the equity method to account for this investment. The following account balances are for the year ending December 31, 2018, for both companies.

	Padre				Sierra
Revenues	$	(1,488,320	)		$	(589,800	)
Cost of goods sold		705,000				415,000
Depreciation expense		295,000				11,100
Amortization expense		0				7,150
Interest expense		48,600				7,550
Equity in income of Sierra		(114,280	)			0
Net income	$	(554,000	)		$	(149,000	)
Retained earnings, 1/1/18	$	(1,372,500	)		$	(454,000	)
Net income		(554,000	)			(149,000	)
Dividends declared		260,000				65,000
Retained earnings, 12/31/18	$	(1,666,500	)		$	(538,000	)
Current assets	$	953,020			$	566,350
Investment in Sierra		833,480				0
Land		363,000				65,900
Buildings and equipment (net)		971,000				333,900
Copyright		0				135,850
Total assets	$	3,120,500			$	1,102,000
Accounts payable	$	(198,000	)		$	(193,000	)
Notes payable		(506,000	)			(211,000	)
Common stock		(300,000	)			(100,000	)
Additional paid-in capital		(450,000	)			(60,000	)
Retained earnings (above)		(1,666,500	)			(538,000	)
Total liabilities and equities	$	(3,120,500	)		$	(1,102,000	)

At year-end, there were no intra-entity receivables or payables.

Using the acquisition method, prepare the worksheet to consolidate these two companies. (For accounts where multiple consolidation entries are required, combine all debit entries into one amount and enter this amount in the debit column of the worksheet. Similarly, combine all credit entries into one amount and enter this amount in the credit column of the worksheet. Amounts in the Debit and Credit columns should be entered as positive. Negative amounts for the Noncontrolling Interest and Consolidated Totals columns should be entered with a minus sign.)

PADRE INC., AND SIERRA CORPORATION Consolidated Worksheet For Year Ending December 31, 2018 Consolidation Entries Accounts Padre Sierra Debit Credit Noncontrolling Interest Consolidated Totals Revenues $(1,488,320) $(589,800) Cost of goods sold 705,000 415,000 Depreciation expense 295,000 11,100 Amortization expense 0 7,150 Interest expense 48,600 7,550 Equity in income of Sierra (114,280) 0 Separate company net income $(554,000) $(149,000) Consolidated net income $0 NI to noncontrolling interest NI to Padre Company $0 Retained earnings 1/1 $(1,372,500) $(454,000) Net income (above) (554,000) (149,000) Dividends declared 260,000 65,000 Retained earnings 12/31 $(1,666,500) $(538,000) $0 Current assets $953,020 $566,350 Investment in Sierra 833,480 Land 363,000 65,900 Buildings and equipment (net) 971,000 333,900 Copyright 0 135,850 Total assets $3,120,500 $1,102,000 $0 Accounts payable $(198,000) $(193,000) Notes payable (506,000) (211,000) NCI in Sierra 1/1 NCI in Sierra 12/31 $0 Common stock (300,000) (100,000) Additional paid-in capital (450,000) (60,000) Retained earnings 12/31 (above) (1,666,500) (538,000) Total liabilities and stockholders' equity $(3,120,500) $(1,102,000) $0 $0 $0

Answer 1

Padre, INC. AND Sierra CORPORATION
- Purchase price allocation and annual amortization
Acquisition-date subsidiary fair value				$    964,000
Book value of subsidiary				(614,000)
Fair value in excess of book value				350,000
Allocations to specific accounts based on difference
between fair value and book value:
Land			$     215,000
Buildings and equipment			(39,000)
Copyright			156,000
Notes payable			18,000	350,000
Total				$                -
				Life	Excess
Annual excess amortizations:				(years)	Amortizations
Buildings and equipment			$      (39,000)	10	$                     (3,900)
Copyright			$     156,000	20	7,800
Notes payable			$       18,000	8	2,250
Total					$                       6,150

Padre, INC. AND Sierra CORPORATION
Consolidation Worksheet
									Non-
					Consolidation Entries				controlling	Consolidated
Accounts			Padre	Sierra		Debit		Credit	Interest	Totals
Revenues			(1,488,320)	(589,800)						(2,078,120)
Cost of goods sold			705,000	415,000						1,120,000
Depreciation expense			295,000	11,100			[E]	3,900		302,200
Amortization expense			-	7,150	[E]	7,800				14,950
Interest expense			48,600	7,550	[E]	2,250				58,400
Equity in income of Sierra			(114,280)	-	[ I ]	114,280				-
Separate company net income			(554,000)	(149,000)
Consolidated net income										(582,570)
Noncontrolling interest in Sierra's income									(28,570)	28,570
Controlling interest in CNI										(554,000)
Retained earnings, 1/1			(1,372,500)	(454,000)	[S]	454,000				(1,372,500)
Net income			(554,000)	(149,000)						(554,000)
Dividends paid			260,000	65,000			[D]	52,000	13,000	260,000
Retained earnings, 12/31			(1,666,500)	(538,000)						(1,666,500)
Current assets			953,020	566,350						1,519,370
Investment in Sierra			833,480	-	[D]	52,000	[S]	491,200
							[ I ]	114,280
							[A]	280,000		-
Land			363,000	65,900	[A]	215,000				643,900
Buildings and equipment (net)			971,000	333,900	[E]	3,900	[A]	39,000		1,269,800
Copyright			-	135,850	[A]	156,000	[E]	7,800		284,050
Total assets			3,120,500	1,102,000						3,717,120
Accounts payable			(198,000)	(193,000)						(391,000)
Notes payable			(506,000)	(211,000)	[A]	18,000	[E]	2,250		(701,250)
NCI in Sierra 1/1							[S]	122,800
NCI in Sierra 12/31							[A]	70,000	(192,800)	(208,370)
									(208,370)
Common stock			(300,000)	(100,000)	[S]	100,000				(300,000)
Additional paid-in capital			(450,000)	(60,000)	[S]	60,000				(450,000)
Retained earnings, 12/31			(1,666,500)	(538,000)						(1,666,500)
Total liabilities and equity			(3,120,500)	(1,102,000)		1,183,230		1,183,230		(3,717,120)