Question

On January 1, 2009, Father Company acquired an 80 percent interest in Sun Company for $425,000. The acquisition-date fair value of the 20 percent noncontrolling interest's ownership shares was $102,500. Also as of that date, Sun reported total stockholders' equity of $400,000: $100,000 in common stock and $300,000 in retained earnings. In setting the acquisition price, Father appraised four accounts at values different from the balances reported within Sun's financial records.

Buildings (8-year life) Undervalued by $20,000
Land. Undervalued by $50,000
Equipment (5-year life) Undervalued by $12,500
Royalty agreement (20-year life) Not recorded, valued at $30,000

As of December 31, 2013, the trial balances of these two companies are as follows:

Father Sun Company Company

Debits
Current assets. $ 605,000 $ 280,000
investment in the sun company 425,000 0
Land 200,000 300,000
Building (net) 640,000 290,000
Equipment (net) 380,000 160,000
Expenses 550,000 190,000
Dividends 90,000 20,000
Total debits. $2,890,000 $1,240,000

Credits
Liabilities. $ 910,000 $ 300,000
Common stock 480,000 100,000
Retained earnings,1/1/13 704,000 480,000
Revenues 780,000 360,000
Total credits. $2,890,000 $1,240,000


Included in these figures is a $20,000 debt that Sun owes to the parent company. No goodwill impairments have occurred since the Sun Company acquisition.

Required

a. Determine consolidated totals for Father Company and Sun Company for the year 2013.
b. Prepare worksheet entries to consolidate the trial balances of Father Company and Sun Company for the year 2013.
c. Assume instead that the acquisition-date fair value of the noncontrolling interest was $112,500. What balances in the December 31, 2013, consolidated statements would change?

Answer 1

ANSWER: a) FATHER COMPANY AND SUN COMPANY Acquisition Date Fair Value Allocation and Amortization 2009 -2012 Allocation Estimated Life (Years) Annual Excess Amortization Acquisition-date S 527,500 fair valuee Sun book value (100%) Excess fair value S127,500 Allocation to specific subsidiary accounts based on fair value: S 400,000 S 20,000 S 50,000 S12,500 S 30,000 Buildings Land Equipment Royalty Agreement Goodwill Annual excess amortization expenses S2,500 S2,500 S 1,500 20 S 15,000 $ 6,500 Goodwill Allocation to the Controlling and Non-controlling Interests Controlling Interests Non controlling Interests Total Fair Value at acquisition date Relative fair value of Sun's net identifiable assets (80% and 20%) Goodwill S 425,000 S 102,500 S 527,500 S410,000 S 102,500 S 512,500 S 15,000 S 15,000 Excess Fair-Value Allocations FATHER COMPANY AND SUN COMPANY Unamortized excess fair value- over book value allocation January 1,2013 Balances Excess Amortization 2009-2012 Accounts Excess o1nginal Allocationn Balances 01/01/13 Buildings Land Equipment Royalty Agreement Goodwill Total S 20,000 S 50,000 S12,500 S 30,000 S 10,000 S 10,000 S 50,000 S 2,500 S 24,000 S 10,000 S 6,000 S 15,000 $ 127,500 S 15,000 S 101,500 S 26,000 b) Six worksheet entries are necessary to produce a consolidation worksheet for Father Company and Sun Company Entrv *C Investment in Sun Company RetainedEarnings, 1/1/13 (parent) This increment is required to adjust the parent's Retained Earnings from the initial value method to the equity method. The amount is S144,000 (80 percent of the $180,000 increase in the subsidiary's book value during previous years) less $20,800 in excess amortization over this same four-year period ($6,500 x 80% x 4 years) S123.200 S123.200 EntryS Common Stock (subsidiary) Retained Earnings, 1/1/13 (subsidiary) Investment in Sun Company (80 percent) Non controlling Interest in Sun Company (20 percent) To eliminate beginning stockholders' equity accounts of the subsidiary and recognize the beginning balance book value attributed to the outside owners (20 percent) S 100,000 S 480,000 S464,000 S116,000 Entry A1 and A2 Combined Buildings Land Equipment Rovalty Agreement Goodwill Investment in Sun Company Non controlling Interest in Sun Company To recognize unamortized excess fair- over book-value allocations as of the first day of the current year. All goodwill is attributable to the controlling interest S 10,000 S 50,000 S2,500 S 24,000 15,000 $ 84,200 $ 17,300 Entry I Dividend Income Dividends Paid To eliminate intra-entity dividend payments recorded by parent (using the initial value method) as income S 16,000 S 16,000 Entiv E Depreciation Expense Amortization Expense Buildings Equipment Royalty Agreement To recognize excess amortization expenses for the current year S 5,000 $ 1,500 S 2,500 S 2,500 S 1,500 Entiy P Liabilities Current Assets To eliminate the intra-entity debt. S 20,000 S 20,000 c) If the acquisition-date fair value of the non controlling interest were S104,500, then Sun's fair value would increase by S2,000 to S529,500 and goodwill would increase by the same $2,000 to $17,000. The entire S2,000 increase in goodwill would be allocated to the non controlling interest as follows Contr olling Interest S 425,000 Non controlling Interest Total Fair value at acquisition date Relative fair value of Sun's S 410,000 net identifiable assets (80% and 20%) S 104,500 S529,500 S 102,500 S512,500 Goodwill S 15,000 S 2,000 S17,000 .. the consolidated balance sheet would show goodwill at $17,000 (instead of $15,000) and the non controlling interest balance would show $164,000 (instead of $162,000) NCI in Sun's 1/1/13 book value (20% × $580.000) NCI in unamortized excess fair-value allocations (20% x $86,500) S 116,000 S17,300 January 1, 2013, NCI in Sun's fair value S 133,300 NCI in Sun's net income [20% x ($360.000-196.500)] NCI dividend share (20% x $20.000) Total non controlling interest December 31, 2013 S 32,700 S (4,000) S 162,000 Non controlling Interest in Subsidiary, 12/31/13-$162,000