Question

Patrick Corporation acquired 100 percent of O’Brien Company’s outstanding common stock on January 1, for $653,100 in cash. O’Brien reported net assets with a carrying amount of $389,000 at that time. Some of O’Brien’s assets either were unrecorded (having been internally developed) or had fair values that differed from book values as follows:

	Book Values		Fair Values
Trademarks (indefinite life)	$	84,000	$	217,000
Customer relationships (5-year remaining life)		0		102,000
Equipment (10-year remaining life)		364,000		316,000

Any goodwill is considered to have an indefinite life with no impairment charges during the year.

Following are financial statements at the end of the first year for these two companies prepared from their separately maintained accounting systems. O’Brien declared and paid dividends in the same period. Credit balances are indicated by parentheses.

	Patrick				O'Brien
Revenues	$	(1,200,000	)		$	(872,000	)
Cost of goods sold		320,000				404,000
Depreciation expense		100,200				73,200
Amortization expense		27,000				0
Income from O'Brien		(379,200	)			0
Net income	$	(1,132,000	)		$	(394,800	)
Retained earnings 1/1	$	(894,000	)		$	(347,000	)
Net income		(1,132,000	)			(394,800	)
Dividends declared		145,000				83,000
Retained earnings 12/31	$	(1,881,000	)		$	(658,800	)
Cash	$	243,000			$	136,000
Receivables		358,000				60,900
Inventory		181,000				220,000
Investment in O'Brien		1,007,300				0
Trademarks		482,000				77,100
Customer relationships		0				0
Equipment (net)		938,000				316,000
Goodwill		0				0
Total assets	$	3,209,300			$	810,000
Liabilities	$	(928,300	)		$	(51,200	)
Common stock		(400,000	)			(100,000	)
Retained earnings 12/31		(1,881,000	)			(658,800	)
Total liabilities and equity	$	(3,209,300	)		$	(810,000	)

1. Which investment method did Patrick use to compute the $379,200 income from O'Brien?

2. Determine the totals to be reported for this business combination for the year ending December 31.

3. Verify the totals determined in part (b) by producing a consolidation worksheet for Patrick and O’Brien for the year ending December 31.

Answer 1