Question

On January 1, 2018, Boston paid $10,000 cash and borrowed 75,000 to obtain 80 percent of the outstanding common shares of Westford. The 75,000 debt is payable in 10 equal annual principal payments, plus interest (annual interest rate 10%), beginning December 31. On the date of acquisition, Westford’s book value was 75,000 The excess fair value of the investment over the underlying book value of the acquired net assets is allocated to inventory (60%), a building (20%), and to goodwill (20%). Inventories are sold on FIFO basis. Buildings are depreciated in 10 years, straight-line. Westford announces no net income or dividends during 2018 and 2019.

On December 31, 2019, Boston Corporation and Westford Corporation had condensed balance sheets as follows:

	Boston	Westford
Current Assets	95,000	45,000
Noncurrent Assets	115,000	65,000
Total Assets	210,000	110,000
Current Liabilities	55,000	35,000
Long-term Debt	75,000	0
Stockholders’ equity	80,000	75,000
Total Liability and Stockholders’ equity	210,000	110,000

On a consolidated balance sheet, what should be the amount for each of the following? (Hint: When you consider each type of firm resources, such as current assets, think about how the above information affects your consideration. For example, are inventories current assets? Similar considerations shall be applied to answering all questions).

1. Consolidated Current assets on December 31, 2019
2. Consolidated Noncurrent assets on December 31, 2019
3. Consolidated Current Liabilities on December 31, 2019
4. Consolidated Noncurrent liabilities on December 31, 2019
5. Consolidated Stockholders’ equity on December 31, 2019
6. Consolidated Investment in Westford on December 31, 2019

Answer 1

In a business combination accounted for as an acquisition, the subsidiary may be acquired for cash, stock, debt securities etc. The investment in subsidiary is valued at fair value of the consideration given. The accounting for an acquisition begins at the date of acquisition. At the date of acquisition we should calculate Net book value of subsidiary, Fair value adjustments for subsidiary balance sheet, Value of consideration, Noncontrolling interest (if any),

Acquisition date calculations :

Date of Acquisition : On January 1, 2018, Boston acquired 80 percent of Westford.

The value of investment in subsidiary = $ 85,000 (for 80% of wstford)

Total fair value of Subsidiary (Westford) will be $ 106,250 (85,000 / 80 %)

Noncontrolling interest (20% ) = 21,250 ( 106,250 * 20%)

Excess of fair value of Subsidiary over book value = 31,250 ( 106,250 - 75,000)

The excess fair value is allocated to inventory $ 18,750 (60%), a building $ 6,250 (20%), and to goodwill $ 6,250(20%).

Below will be acquisition date eliminating journal entry

Description	Debit	Credit
Stockholders’ equity (Subsidiary)	75,000
Investment in Subsidiary (Parent)		85,000
Noncontrolling interest (20%)		21,250
Inventory (60%) in Subsidiary	18,750
Building (20%) in Subsidiary	6,250
Goodwill (20%) in Subsidiary	6,250
Total	106,250	106,250

After acuqisition date following adjustment will be made

Investment in Subsidiary (Parent)	Y 2018	Y 2019	Remarks
Beginning Investment	85,000	65,625
Add: Share of Subsidiary profit	-	-	Westford announces NIL net income
Less: Share of subsidiary dividends	-	-	No Dividend paid
Fair value Inventory adjustment	(18,750)	-	it is assumed all inventory sold in year 2018
Fair vale Building amortization	(625)	(625)	Building FV depreciated over 10 years
Goodwill Impairement	-		Goodwill not Impaired
Ending Investment	65,625	65,000

On December 31, 2019, Boston Corporation and Westford Corporation had condensed balance sheets as follows:

Consolidated Current assets on December 31, 2019	140,000
Consolidated Noncurrent assets on December 31, 2019	126,250
Consolidated Current Liabilities on December 31, 2019	90,000
Consolidated Noncurrent liabilities on December 31, 2019	75,000
Consolidated Stockholders’ equity on December 31, 2019	80,000
Consolidated Investment in Westford on December 31, 2019	65,000

Working Notes :

	Boston	Westford	Adjustments	Consolidated
Current Assets	95,000	45,000	-	140,000
Noncurrent Assets	115,000	65,000	(60,000)	120,000
Noncurrent Assets - Goodwill (20%)			6,250	6,250
Total Assets	210,000	110,000	(53,750)	266,250
Current Liabilities	55,000	35,000		90,000
Long-term Debt	75,000	-		75,000
Stockholders’ equity	80,000	75,000	(75,000)	80,000
Noncontrolling interest (20%)			21,250	21,250
Total Liability and Stockholders’ equity	210,000	110,000	(53,750)	266,250

	Begining	01-Jan-2018		as on 31 Dec 2019
	eliminating journal entry	Y 2018 & 2019	eliminating journal entry
Description	Debit	Credit	Adjustments	Debit	Credit
Stockholders’ equity (Sub)	75,000			75,000
Investment in Subsidiary (Parent)		85,000	(20,000)		65,000
Noncontrolling interest (20%)		21,250			21,250
Inventory (60%) in Subsidiary	18,750		(18,750)	-
Building (20%) in Subsidiary	6,250		(1,250)	5,000
Goodwill (20%) in Subsidiary	6,250		-	6,250
Total	106,250	106,250		86,250	86,250