Question

The Holtz Corporation acquired 80 percent of the 100,000 outstanding voting shares of Devine, Inc., for $6.70 per share on January 1, 2017. The remaining 20 percent of Devine’s shares also traded actively at $6.70 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 $57,000 and a fully amortized trademark with an estimated 10-year remaining life had a $69,000 fair value. At the acquisition date, Devine reported common stock of $100,000 and a retained earnings balance of $224,000.

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

	Holtz Corporation				Devine, Inc.
Sales	$	(800,000	)		$	(379,500	)
Cost of goods sold		285,000				146,000
Operating expenses		299,000				130,500
Dividend income		(16,000	)			0
Net income	$	(232,000	)		$	(103,000	)
Retained earnings, 1/1/18	$	(777,000	)		$	(294,000	)
Net income (above)		(232,000	)			(103,000	)
Dividends declared		90,000				20,000
Retained earnings, 12/31/18	$	(919,000	)		$	(377,000	)
Current assets	$	238,500			$	177,000
Investment in Devine, Inc		536,000				0
Buildings and equipment (net)		870,000				357,000
Trademarks		137,000				188,000
Total assets	$	1,781,500			$	722,000
Liabilities	$	(542,500	)		$	(245,000	)
Common stock		(320,000	)			(100,000	)
Retained earnings, 12/31/18 (above)		(919,000	)			(377,000	)
Total liabilities and equities	$	(1,781,500	)		$	(722,000	)

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 $4.50 surrounding Holtz’s acquisition date, what is the impact on goodwill?

Answer 1

Part A

HOLTZ CORPORATION AND DEVINE INC.

Consolidated Worksheet

For the year ending December 31, 2018

Accounts	Holtz corporation	Devine Inc.			Noncontrolling interest	Consolidated total s
			Debit	Credit
Sales	(800000)	(379500)				(1179500)
Cost of goods sold	285000	146000				431000
Operating expenses	299000	130500	18300			447800
Dividend income	(16000)	0	16000
Separate company net income	(232000)	(103000)
Consolidated net income						(300700)
NI attributable to noncontrolling interest					(16940)	16940
NI attributable to Holtz Corp.						(283760)
Retained earnings, 1/1	(777000)	(294000)	294000	41360		(818360)
Net income	(232000)	(103000)				(283760)
Dividends declared	90000	20000		16000	4000	90000
Retained earnings, 12/31	(919000)	(377000)				(1012120)
Current assets	238500	177000				415500
Investment in Devine	536000		41360	577360		0
Buildings and equipment (net)	870000	357000	45600	11400		1261200
Trademarks	137000	188000	62100	6900		380200
Goodwill			220000			220000
Total assets	1781500	722000				2276900
Liabilities	(542500)	(245000)				(787500)
Common stock	(320000)	(100000)	100000			(320000)
Retained earnings 12/31	(919000)	(377000)				(1012120)
NCI in Devine, 1/1				144340	(144340)
NCI in Devine, 12/31					(157280)	(157280)
	(1781500)	(722000)	797360	797360		(2276900)

Fair value allocation and amortization

Consideration transferred by Holtz (100000*6.70*80%)	536000
Noncontrolling interest fair value (100000*6.70*20%)	134000
Devine total fair value 1/1/17	670000
Devine book value 1/1/17 (100000+224000)	(324000)
Fair value in excess of book value	346000
Excess fair value assigned to specific accounts based on fair value:		Remaining life	Annual excess amortizations
Building	57000	5	11400
Trademark	69000	10	6900
Goodwill (346000-57000-69000)	220000	indefinite	0
			18300

NI attributable to noncontrolling interest = (103000-18300)*20% = 16940

Change in subsidiary RE from 1/1/17 to 1/1/18 (294000-224000)	70000
Excess amortization for 2017	18300
Adjusted subsidiary RE increase	51700
Percentage of ownership by parent	80%
*C conversion entry	41360

57000-11400 = 45600

69000-6900 = 62100

Part B

HOLTZ CORPORATION AND DEVINE INC.

Consolidated Income Statement

For the year ending December 31, 2018

Sales		$1179500
Cost of goods sold	431000
Operating expenses	447800
Total expenses		878800
Consolidated net income		$300700
To noncontrolling interest (20%)		$60140
To Holtz corporation (80%)		$240560

Part C

Goodwill

decline

to

$176000

Consideration transferred by Holtz (100000*6.70*80%)	536000
Noncontrolling interest fair value (100000*4.50*20%)	90000
Devine fair value	626000
Fair value of Devine’s underlying net assets (100000*4.50)	450000
Goodwill	$176000