Question

Parker, Inc., acquires 70 percent of Sawyer Company for $420,000. The remaining 30 percent of Sawyer’s outstanding shares continue to trade at a collective value of $174,000. On the acquisition date, Sawyer has the following accounts:

	Book Value				Fair Value
Current assets	$	210,000			$	210,000
Land		170,000				180,000
Buildings		300,000				330,000
Liabilities		(280,000	)			(280,000	)

The buildings have a 10-year remaining life. In addition, Sawyer holds a patent worth $140,000 that has a five-year remaining life but is not recorded on its financial records. At the end of the year, the two companies report the following balances:

	Parker			Sawyer
Revenues	$	(900,000	)	$	(600,000	)
Expenses		600,000			400,000

1. Assume that the acquisition took place on January 1. What figures would appear in a consolidated income statement for this year?

2. Assume that the acquisition took place on April 1. Sawyer’s revenues and expenses occurred uniformly throughout the year. What amounts would appear in a consolidated income statement for this year?

	a. January 1 b. April 1 Combined revenues Combined expenses Consolidated net income Net income attributable to noncontrolling interest Net income attributable to Parker, Inc.

Answer 1

SOLUTION:

Particulars	a. January 1 ($)	b. April 1 ($)
Combined Revenues	15,00,000	13,50,000
Combines Expenses	10,31,000	9,23,250
Consolidated Net Income	4,69,000	4,26,750
Net Income Attributable to Non Controlling Interest	50,700	38,025
Net Income Attributable to Parker Inc	4,18,300	3,88,725

CALCULATIONS:

Adjustment of Purchase value Vs Fair Value

Amnt($)

Parker Acquire 70% share In Sawyer	4,20,000
Non Controlling Interest - 30%	1,74,000
Total Investment made by parker	5,94,000	( Fair Value)
Book Value of Asset at the time of Acquition	4,00,000
Fair Value excess of Book Value	1,94,000

Book Value- Subsidiary	Amnt($)	Amnt($)	Change in Value
	Book Value	Fair Value	($)
Current Assets	2,10,000	2,10,000	-
Land	1,70,000	1,80,000	10,000
Building	3,00,000	3,30,000	30,000
Total Asset	6,80,000	7,20,000	40,000
Liabilities	2,80,000	2,80,000	-
Net Book Vaue	4,00,000	4,40,000	40,000

Goodwill determination on the basis of Fair value excess of Book Value:

Particulars	Amnt($)	Life of the asset	Depreciation($)
Fair value excess of Book Value	1,94,000
Land ( Differential Value)	10,000
Building ( Differential Value)	30,000	10	3,000
Patent ( as per Question)	1,40,000	5	28,000
Goodwill	14,000		31,000

Income Statement( Acquisition date -01st Jan):

Particulars	Parker ( $)	Sawyer ($)	Consolidated ($)	Adjustment ($)	Consolidated- after Adj ($)
Revenue	9,00,000	6,00,000	15,00,000		15,00,000
Expenses	6,00,000	4,00,000	10,00,000		10,31,000
Depreciation				31,000
Net Margin		2,00,000			4,69,000
Allocation between Non Controlling Interest					50,700
( Sawyer Net Margin = Revenue - Expenses )-Depreciaton *30%
( $ 600000 - $400000 - $ 31000)*30%
Parent ( Parker share)					4,18,300

Income Statement( acquisition date 1 April):

Particulars	Parker ( $)	Sawyer ($)	3 Month factor (Jan- March)	Sawyer($)-Adjusted Part	Consolidated ($)	Adjustment ($)	Consolidated- after Adj ($)
Revenue	9,00,000	6,00,000	1,50,000	4,50,000	13,50,000		13,50,000
Expenses	6,00,000	4,00,000	1,00,000	3,00,000	9,00,000		9,23,250
Depreciation				-	31,000	23,250
Net Margin				1,50,000			4,26,750
( Sawyer Net Margin = Revenue - Expenses )-Depreciaton *30%							38,025
(150000-23250)*30%
Adjusted depreciation
31000-31000*3/12)
Parent ( Parker share)							3,88,725