Question

On January 1, 2014, Allan Company bought a 15 percent interest in Sysinger Company. The acquisition price of $184,500 reflected an assessment that all of Sysinger’s accounts were fairly valued within the company’s accounting records. During 2014, Sysinger reported net income of $100,000 and declared cash dividends of $30,000. Allan possessed the ability to influence significantly Sysinger’s operations and, therefore, accounted for this investment using the equity method. On January 1, 2015, Allan acquired an additional 80 percent interest in Sysinger and provided the following fair-value assessments of Sysinger’s ownership components: Consideration transferred by Allan for 80% interest . . . . . . . . . . . . . $1,400,000 Fair value of Allan’s 15% previous ownership . . . . . . . . . . . . . . . . . . 262,500 Noncontrolling interest’s 5% fair value . . . . . . . . . . . . . . . . . . . . . . . 87,500 Total acquisition-date fair value for Sysinger Company . . . . . . . . . . . $1,750,000 Also, as of January 1, 2015, Allan assessed a $400,000 value to an unrecorded customer contract recently negotiated by Sysinger. The customer contract is anticipated to have a remaining life of 4 years. Sysinger’s other assets and liabilities were judged to have fair values equal to their book values. Allan elects to continue applying the equity method to this investment for internal reporting purposes. At December 31, 2015, the following financial information is available for consolidation: Allan Company Sysinger Company Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (931,000) $ (380,000) Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 615,000 230,000 Equity earnings of Sysinger . . . . . . . . . . . . . . . . . . . . . . . . . (47,500) –0– Gain on revaluation of Investment in Sysinger to fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (67,500 ) –0– Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 431,000 $ 150,000 LO 4-9 (continued ) hoy62228_ch04_149-202.indd 198 11/5/13 3:42 PM Final PDF to printer Consolidated Financial Statements and Outside Ownership 199 Allan Company Sysinger Company Retained earnings, January 1 . . . . . . . . . . . . . . . . . . . . . . . . $ (965,000) $ (600,000) Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (431,000) (150,000) Dividends declared . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,000 40,000 Retained earnings, December 31 . . . . . . . . . . . . . . . . . . . . . $(1,256,000 ) $ (710,000 ) Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 288,000 $ 540,000 Investment in Sysinger (equity method) . . . . . . . . . . . . . . . . 1,672,000 –0– Property, plant, and equipment . . . . . . . . . . . . . . . . . . . . . . 826,000 590,000 Patented technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 850,000 370,000 Customer contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –0– –0– Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,636,000 $ 1,500,000 Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,300,000) $ (90,000) Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (900,000) (500,000) Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . (180,000) (200,000) Retained earnings, December 31 . . . . . . . . . . . . . . . . . . . . . (1,256,000 ) (710,000 ) Total liabilities and equities . . . . . . . . . . . . . . . . . . . . . . . $(3,636,000 ) $(1,500,000 ) a. How should Allan allocate Sysinger’s total acquisition-date fair value (January 1, 2015) to the assets acquired and liabilities assumed for consolidation purposes? b. Show how the following amounts on Allan’s preconsolidation 2015 statements were derived: • Equity in earnings of Sysinger. • Gain on revaluation of Investment in Sysinger to fair value. • Investment in Sysinger. c. Prepare a worksheet to consolidate the financial statements of these two companies as of December 31, 2015. At year-end, there were no intra-entity receivables or payables.

Answer 1

Answer:

a.     Fair value of Sysinger 1/1/15 (given) $1,750,000

          Book value of Sysinger 1/1/15 (CS + APIC + RE)   1,300,000

  Excess fair value over book value   450,000

   To customer contract (4 year remaining life) 400,000

           To goodwill   $50,000

b.       Equity in earnings of Sysinger

  2015net income (150,000 × 95%)   $142,500

  Amortization (100,000 × 95%)   (95,000)

  Equity in earnings of Sysinger $47,500

          Revaluation of 15% block to fair value                                                                     

Consideration transferred $184,500

2014net income (100,000 × 15%)                                                                    15,000

2014 dividends (30,000 × 15%)                                                                       (4,500)

Book value at 1/1/15   195,000

Fair value at 1/1/15 262,500

Gain on revaluation                                                                                        $67,500

            Investment account balance                                                                                       

Fair value at 1/1/15 (15% block)                                                                  $262,500

Consideration transferred 1/1/15 (80% block)   1,400,000

Equity earnings 2015

      Net income (95% × 150,000)                                               142,500

  Customer contract amortization   (95,000)   47,500

Dividends (40,000 × 95%)                                                                             (38,000)

Investment in Sysinger 12/31/15    $1,672,000

c.