In: Accounting
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 |
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 |