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Consolidation Working Paper, Noncontrolling Interest, Intercompany Merchandise Transactions Kellogg Company (Kellogg's) acquired 75% of the outstanding...

Consolidation Working Paper, Noncontrolling Interest, Intercompany Merchandise Transactions

Kellogg Company (Kellogg's) acquired 75% of the outstanding stock of Wholesome & Hearty Foods ("Wholesome") at the end of 2007 for cash and stock totaling $240 million. Assume that Wholesome's assets and liabilities were fairly reported at the date of acquisition, except for these items:

(in thousands) Book Value Fair Value
Plant & Equipment, net (10-year life, straight-line) $300,000 $270,000
Veggie Burger recipe (10-year life, straight-line) 0 50,000
Long-term debt (4-year life, straight-line) 60,000 68,000

Wholesome's book value at the date of acquisition was $148 million, and the fair value of the 25% noncontrolling interest was $70 million. It is now December 31, 2013 (the end of the sixth year since acquisition). Impairment testing on the goodwill arising in this acquisition reveals that total impairment during 2008-2012 is $2 million, and impairment in 2013 is $1 million.

Wholesome sells merchandise and raw materials to Kellogg's at a markup of 30% on cost. Here is information on these intercompany sales (in thousands):

Inventory, January 1, 2013, reported on Kellogg's books $20,800
Inventory, December 31, 2013, reported on Kellogg's books 26,000
Transfer price for 2013 sales from Wholesome to Kellogg's 120,000

Below are the separate trial balances of Kellogg's and Wholesome at December 31, 2013.

Dr(Cr)
(in thousands) Kellogg's Wholesome
Current assets $35,000 $40,000
Plant and equipment, net 256,300 384,000
Investment in Wholesome 264,600 --
Identifiable intangibles 100,000 20,000
Current liabilities (30,000) (50,000)
Long-term debt (350,000) (200,000)
Capital stock (100,000) (108,000)
Retained earnings, January 1 (136,600) (76,000)
Sales revenue (425,000) (280,000)
Equity in net income of Wholesome (4,300) --
Cost of sales 250,000 130,000
Operating expenses 140,000 140,000
Totals $0 $0

In your answers below, present all numbers in thousands; round answers to the nearest thousand.

(a) Calculate the initial goodwill arising from this acquisition, and its allocation to the controlling and noncontrolling interests.

When appropriate, use negative signs with your revaluation answers (left column only). Do not use negative signs with your answers in the right column.

Calculation of goodwill (in thousands)
Acquisition cost $Answer
Fair value of noncontrolling interest Answer
Total fair value $Answer
Book value of Wholesome $Answer
Revaluations:
Plant and equipment, net Answer
Intangibles Answer
Long-term debt Answer Answer
Goodwill $Answer
Allocation of goodwill (in thousands)
Total goodwill $Answer
Kellogg's goodwill Answer
Goodwill to noncontrolling interest $Answer

(b) Prepare a schedule computing Kellogg's equity in net income of Wholesome and noncontrolling interest in net income for 2013.

Use negative signs with revaluation and inventory profit answers that reduce the total(s).

(in thousands) Total Equity in net income of Wholesome Noncontrolling interest in net income of Wholesome
Wholesome's reported net income for 2013 $Answer $Answer $Answer
Revaluation writeoffs for 2013:
Plant & Equipment Answer Answer Answer
Intangibles Answer Answer Answer
Goodwill Answer Answer Answer
Intercompany sales adjustments:
Upstream beg. inventory profit confirmed Answer Answer Answer
Upstream end. inventory profit unconfirmed Answer Answer Answer
Total $Answer $Answer $Answer

(c) Prepare a working paper to consolidate the trial balances of Kellogg's and Wholesome at December 31, 2013.

Remember to use negative signs with your credit balance answers in the Consolidate Balances column.

Consolidation Working Paper
Trial Balances Taken From Books Eliminations
(in thousands) Kellogg's
Dr (Cr)
Wholesome
Dr (Cr)
Debit Credit Consolidated Balances
Dr (Cr)
Current assets $35,000 $40,000 Answer (I-3) $Answer
Plant and equipment, net 256,300 384,000 (O) Answer Answer (R) Answer
Investment in Wholesome 264,600 - Answer (C) Answer
Answer (E)
Answer (R)
Identifiable intangibles 100,000 20,000 (R) Answer Answer (O) Answer
Goodwill - - (R) Answer Answer (O) Answer
Current liabilities (30,000) (50,000) Answer
Long-term debt (350,000) (200,000) Answer
Capital stock (100,000) (108,000) (E) Answer Answer
Retained earnings, Jan. 1 (136,600) (76,000) (I-2) Answer Answer
(E) Answer
Noncontrolling interest Answer (E) Answer
Answer (R)
Answer (N)
Sales revenue (425,000) (280,000) (I-1) Answer Answer
Equity in NI of Wholesome (4,300) - (C) Answer Answer
Cost of goods sold 250,000 130,000 (I-3) Answer Answer (I-2) Answer
Answer (I-1)
Operating expenses 140,000 140,000 (O) Answer Answer
Noncontrolling interest in NI - - (N) Answer - Answer
Total $0 $0 $Answer $Answer $Answer

Solutions

Expert Solution

Wholesome's book value at the date of acquisition was $148 million, and the fair value of the 25% noncontrolling interest was $70 million. It is now December 31, 2013 (the end of the sixth year since acquisition). Impairment testing on the goodwill arising in this acquisition reveals that total impairment during 2008-2012 is $2 million, and impairment in 2013 is $1 million.

Wholesome sells merchandise and raw materials to Kellogg's at a markup of 30% on cost. Here is information on these intercompany sales (in thousands):

Inventory, January 1, 2013, reported on Kellogg's books $20,800
Inventory, December 31, 2013, reported on Kellogg's books 26,000
Transfer price for 2013 sales from Wholesome to Kellogg's 120,000

Below are the separate trial balances of Kellogg's and Wholesome at December 31, 2013.

Dr(Cr)
(in thousands) Kellogg's Wholesome
Current assets $35,000 $40,000
Plant and equipment, net 256,300 384,000
Investment in Wholesome 264,600 --
Identifiable intangibles 100,000 20,000
Current liabilities (30,000) (50,000)
Long-term debt (350,000) (200,000)
Capital stock (100,000) (108,000)
Retained earnings, January 1 (136,600) (76,000)
Sales revenue (425,000) (280,000)
Equity in net income of Wholesome (4,300) --
Cost of sales 250,000 130,000
Operating expenses 140,000 140,000
Totals $0 $0

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