Question

Padre, Inc., buys 80 percent of the outstanding common stock of Sierra Corporation on January 1, 2015, for $796,960 cash. At the acquisition date, Sierra’s total fair value, including the noncontrolling interest, was assessed at $996,200 although Sierra’s book value was only $623,000. Also, several individual items on Sierra’s financial records had fair values that differed from their book values as follows:

	Book Value			Fair Value
Land	$	60,600		$	286,600
Buildings and equipment   (10-year remaining life)		340,000			322,000
Copyright (20-year life)		172,000			322,000
Notes payable (due in 8 years)		(132,000	)		(116,800	)

For internal reporting purposes, Padre, Inc., employs the equity method to account for this investment. The following account balances are for the year ending December 31, 2015, for both companies.

		Padre			Sierra	Consolidated Totals
Revenues	$	(1,396,980	)	$	(657,250	)
Cost of goods sold		736,000			399,000
Depreciation expense		298,000			15,100
Amortization expense		0			8,600
Interest expense		50,100			5,550
Equity in income of Sierra		(177,120	)		0
Net income	$	(490,000	)	$	(229,000	)
Retained earnings, 1/1/15	$	(1,380,000	)	$	(463,000	)
Net income (above)		(490,000	)		(229,000	)
Dividends declared		260,000			65,000
Retained earnings, 12/31/15	$	(1,610,000	)	$	(627,000	)
Current assets	$	854,920		$	569,100
Investment in Sierra		922,080			0
Land		369,000			60,600
Buildings and equipment (net)		955,000			324,900
Copyright		0			163,400
Total assets	$	3,101,000		$	1,118,000
Accounts payable	$	(220,000	)	$	(199,000	)
Notes payable		(521,000	)		(132,000	)
Common stock		(300,000	)		(100,000	)
Additional paid-in capital		(450,000	)		(60,000	)
Retained earnings (above)		(1,610,000	)		(627,000	)
Total liabilities and equities	$	(3,101,000	)	$	(1,118,000	)

At year-end, there were no intra-entity receivables or payables.

Using the acquisition method, prepare the worksheet to consolidate these two companies.

     

Answer 1

Ans:

Determination of consolidate Balances:

Acquisition-date subsidiary fair value (given)                      $996,200

Book value of subsidiary (given)                                           $623,000

Fair value in excess of book value                                         $373,200

Allocations to specific accounts based on difference between fair value and book value

Land                                                      $226,000

Buildings and equipment                        $18,000

Copyright                                              $150,000

Notes payable                                         $15,200

Total                                        $373,200

Annual excess amortizations:

Buildings and equipment ($18,000 / 10)                 $1,800

Copyright ($150,000 / 20)                                       $7,500                  

Notes payable ($15,200 / 8)                                     $1,900

Total                                                             $7,600

Acquisition Method:
			Consolidation Entries
Accounts	Padre	Sierra	Debit		Credit		No controlling Interest	Consolidates Total
Revenues	(1,396,980)	(657,250)						(2,054,230)
Cost of goods sold	736,000	399,000						1,135,000
Depreciation Expense	298,000	15,100			E	1,800		311,300
Amortization Expense	-	8,600	E	7,500				16,100
Interest Expense	50,100	5,550	E	1,900				57,550
Equity in Income of Sierra	(177,120)	-	I	177,120				-
Separate Company Net Income	(490,000)	(229,000)
consolidate Net Income								(534,280)
No controlling Interest in Sierra's Income							(44,280)	44,280
Controlling Interest in CNI								(490,000)
Retained Earnings 1 / 1	(1,380,000)	(463,000)	S	(463,000)				(1,380,000)
Net Income (above)	(490,000)	(229,000)						(490,000)
Dividend Paid	260,000	65,000			D	52,000	13,000	260,000
Retained Earnings 12/31	(1,610,000)	(627,000)						(1,610,000)
Current Assets	854,920	569,100						1,424,020
Investments in Sierra	922,080	-	D	52,000	S
					I
					A			-
Land	369,000	60,600	A	226,000				655,600
Buildings and Equipment	955,000	324,900	E	1,800	A	18,000		1,263,700
Copyright	-	163,400	A	150,000	E	7,500		305,900
Total Assets	3,101,000	1,118,000						3,649,220
Accounts Payable	(220,000)	(199,000)						(419,000)
Notes Payable	(521,000)	(132,000)	A	15,200	E	1,900		(639,700)
NCI in Sierra 1/1
NCI in Sierra 12/ 31							(199,240)
							(230,520)	(230,520)
Common Stock	(300,000)	(100,000)	S	100,000				(300,000)
Additional paid-in capital	(450,000)	(60,000)	S	60,000				(450,000)
Retained Earnings 12/31 (above)	(1,610,000)	(627,000)						(1,610,000)
Total liabilities and Stockholders’ Equity	(3,101,000)	(1,118,000)						(3,649,220)