Question

The Holtz Corporation acquired 80 percent of the 100,000 outstanding voting shares of Devine, Inc., for $7.50 per share on January 1, 2017. The remaining 20 percent of Devine’s shares also traded actively at $7.50 per share before and after Holtz’s acquisition. An appraisal made on that date determined that all book values appropriately reflected the fair values of Devine’s underlying accounts except that a building with a 5-year future life was undervalued by $46,500 and a fully amortized trademark with an estimated 10-year remaining life had a $76,000 fair value. At the acquisition date, Devine reported common stock of $100,000 and a retained earnings balance of $351,500.

Following are the separate financial statements for the year ending December 31, 2018:

	Holtz Corporation				Devine, Inc.
Sales	$	(786,000	)		$	(379,000	)
Cost of goods sold		291,000				118,000
Operating expenses		289,000				78,000
Dividend income		(16,000	)			0
Net income	$	(222,000	)		$	(183,000	)
Retained earnings, 1/1/18	$	(733,000	)		$	(421,500	)
Net income (above)		(222,000	)			(183,000	)
Dividends declared		90,000				20,000
Retained earnings, 12/31/18	$	(865,000	)		$	(584,500	)
Current assets	$	311,500			$	272,500
Investment in Devine, Inc		600,000				0
Buildings and equipment (net)		722,500				456,000
Trademarks		156,000				212,000
Total assets	$	1,790,000			$	940,500
Liabilities	$	(605,000	)		$	(256,000	)
Common stock		(320,000	)			(100,000	)
Retained earnings, 12/31/18 (above)		(865,000	)			(584,500	)
Total liabilities and equities	$	(1,790,000	)		$	(940,500	)

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

1. Prepare a worksheet to consolidate these two companies as of December 31, 2018.

2. Prepare a 2018 consolidated income statement for Holtz and Devine.

3. If instead the noncontrolling interest shares of Devine had traded for $5.74 surrounding Holtz’s acquisition date, what is the impact on goodwill?

Answer 1

Answer:

Calculation of Godwill on the date of acquisition as on 1/1/2017
Fair Value transfer by Holtz Corporation for 80% share (100,000 shares * 80% * 7.50)	600,000
Fair Value of Non Controlling Interest (100,000 Shares * 20% * 7.50)	150,000
Total Fair Value of Devine ltd	750,000
Less :Book Value
Common Stock	100,000
Retained Earnings 1/1/17	351,500
Excess of Fair value over Book Value	298,500
Allocation of Excess Fair Value to:
Building	46,500
Trademark	76,000
Goodwill (298,500 - 46,500 - 76,000)	176,000

Amortization and carrying Value of excess fair value of Assets:

Assets	Value as on 1/1/2017 (A)	Life in Years (B)	Amortization per Year C = A/B	Value as on 1/1/2018 D=A-C
Building	46500	5	9,300	37,200
Trademark	76000	10	7,600	68,400
Goodwill	176000	-	-	176,000
Total	298,500	-	16,900	281,600

HOLTZ CORPORATION AND DEVINE INC.
Consolidated Worksheet
For the year Ending December 31, 2018
			Consolidation
Accounts	Holtz Corporation	Divine Inc.		Debit	Credit		Non Controlling Interest	Consolidated Totals
Sales	(786,000)	(379,000)	-	-	-	-	-	(1,165,000)
Cost Of Goods Sold	291,000	118,000	-	-	-	-	-	409,000
Operating Expenses	289,000	78,000	[D]	16,900	-	-	-	383,900
Dividend Income	(16000)	-	[C]	16,000	-	-	-	-
Seperate Company Net Income	(222,000)	(183,000)	-	-	-	-	-	-
Consolidated Net Income	-	-	-	-	-	-	-	(372,100)
NI attribute to Controlling Interest	-	-	-	-	-	-	(33,220)	33,220
NI attribute to Holtz Corp.	-	-	-	-	-	-	-	(338,880)
Retained Earnings 1/1	(733,000)	(421,500)	[E]	421,500	42,480	[ADJ]	-	(775,480)
Net Income	(222,000)	(183,000)	-	-	-	-	-	(338,880)
Dividends Declared	90,000	20,000	-	-	16,000	[C]	4000	90,000
Retained Earnings 12/31	(865,000)	(584,500)	-	-	-	-	-	(1,024,360)
Current Assets	-	-	-	-	-	-	-	58,400
Investment in Divine	-	-	[ADJ]	42,480	642,480	[E+A]*80%	-	-
Building and Equipments,Net	-	-	[A]	37,200	9,300	[D]	-	1,206,400
Trademarks	-	-	[A]	68,400	7,600	[D]	-	428,800
Goodwill	-	-	[A]	176,000	-	-	-	176,000
Total Assets-	1,790,000	940,500	-	-	-	-	-	2,395,200
Liabilities	(605,000)	(256,000)						(861,000)
Common Stock	(320,000)	(100,000)	[E]	100,000	-	-	-	(320,000)
Retained Earnings 12/31	(865,000)	(584,500)	-	-	-	-	-	(1,024,360)
NCI in Divine, 1/1	-	-	-	-	160,620	[E+A]*20%	(160,620)	-
NCI in Divine, 12/31	-	-	-	-	-	-	(189,840)	(189,840)
	(1,790,000)	(940,500)	-	878,480	878,480	-	-	(2,395,200)

Working Notes:

[ADJ]: Adjustment for Conversion From Initial Method to Equity Method:

Change in Retained Earnings of Divine from 1/1/2017 to 1/1/2018 = (421,500 - 351,500)	70,000
Less: Excess Amortization	16,900
Adjusted Increase in Retained earnings of Divine Ltd	53,100
Holtz Share 80 % (53,100 * 80%)	42,480

Net Income attribute to Non Controlling Interest:

Net Income of Divine	183,000
Less: Excess Amortization	16,900
Adjusted Net Income of Divine	166,100
Non Controlling Share 20 % (166,100 * 20%)	33,220

Entries Explanation:

[C] It is to eliminate the intra entity dividend declared by the subsidiary and recorded as income by parent.

[E] It is to eliminate the stockholder's equity account of subsidiary while recognizing the Non Comtrolling Interest at the beginning of the year.

Non Controlling Shares: [(Common Stock + Retained Earnings 1/1/2018) * 20%]

Investment in Devine : [(Common Stock + Retained Earnings 1/1/2018) * 80%]

[A] It is to recorf the unamortised fair value of assets as on 1/1/2018 acquired on 1/1/2017.

[D] It is to record the amortization expenses during the year.

Adjusted Credit Balance after Combining Multiple Entires:

	Investment in Holtz	Non controlling Interest 1/1/2018	Total
	80%	20%	100%
Entry [E]
Common Stock	80,000	20,000	100,000
Retained Earnings 1/1/18	337,200	84,300	421,500
Entry [A]	-	-	-
Building and Equipments,net	29,760	7,440	37,200
Trademark	54,720	13,680	68,400
Goodwill	140,800	35,200	176,000
Total	642,480	160,620	803,100

HOLTZ CORPORATION AND DIVINE INC.
Consolidated Income Statement
For year ending December 31, 2018
Sales		1,165,000
Cost Of Goods Sold	409,000
Operating Expenses	383,900
Total Expenses		792,900
Consolidated Net Income		372,100
To Non Controlling Interest		33,220
To Holtz Corporation		338,880

C) If Non Controlling Interest Shares Of Devine had traded for $ 5.74 per share

Fair Value of Transfer by Holtz Corporation for 80% share (100,000 Shares * 80% * 7.50)	600,000
Fair Value of Non Controlling Interest (100,000 * 20% * 5.74)	114,800
Total Fair Value of Devine Ltd	714,800
Less : Book Value
Common Stock	100,000
Ratained Earnings 1/1/2017	351,500
Excess of Fair Value over Book Value	263,300
Allocation of Excess Fair Value to:
Building	46,500
Trademark	76,000
Goodwill (263,300 -46,500 - 76,000)	140,800

Impact On Goodwill:

Goodwill Decrease to

$ 140,800