Question

32. Following are selected accounts for Mergaronite Company and Hill, Inc., as of December 31, 2018. Several of Mergaronite’s accounts have been omitted. Credit balances are indicated by parentheses. Dividends were declared and paid in the same period.

    	Mergaronite	Hill
    Revenues	$(600,000)	$(250,000)
    Cost of goods sold	280,000	100,000
    Depreciation expense	120,000	50,000
    Investment income	Not given	NA
    Retained earnings, 1/1/18	(900,000)	(600,000)
    Dividends declared	130,000	40,000
    Current assets	200,000	690,000
    Land	300,000	90,000
    Buildings (net)	500,000	140,000
    Equipment (net)	200,000	250,000
    Liabilities	(400,000)	(310,000)
    Common stock	(300,000)	(40,000)
    Additional paid-in capital	(50,000)	(160,000)

    page 144

    Assume that Mergaronite took over Hill on January 1, 2014, by issuing 7,000 shares of common stock having a par value of $10 per share but a fair value of $100 each. On January 1, 2014, Hill’s land was undervalued by $20,000, its buildings were overvalued by $30,000, and equipment was undervalued by $60,000. The buildings had a 10-year remaining life; the equipment had a 5-year remaining life. A customer list with an appraised value of $100,000 was developed internally by Hill and was to be written off over a 20-year period.

    1. Determine and explain the December 31, 2018, consolidated totals for the following accounts:

       Revenues	Amortization Expense	Customer List
       Cost of Goods Sold	Buildings	Common Stock
       Depreciation Expense	Equipment	Additional Paid-In Capital

    2. In requirement (a), why can the consolidated totals be determined without knowing which method the parent used to account for the subsidiary?

    3. If the parent uses the equity method, what consolidation entries would be used on a 2018 worksheet?

Answer 1

A)Consolidation :

Consolidation is the process of combing the financial statements of holding company and subsidiary company

Consolidated revenues = ($6,00,000+$2,50,000)

= $8,50,000

Consolidated cost of goods sold = ($2,80,000+$1,00,000)

= $3,80,000

The consolidated depreciation expense amount will be the sum for both companies plus the additional depreciation from of equipment and buildings.

Calculation of the expense to equipment as the undervalue amount divided by year left :

$60,000/5 = $12,000

Buildings were actually overvalued and will decrease the amount of depreciation calculation of decrease to amortization each year as the overvalued amount divided by years left

($30,000)/ 10 = ($3000)

Calculation of consolidated depreciation expense =

$1,20,000+$50,000+$12000+($3000)= $ 1,79,000

The amortization expense will be only be for the customer list calculation of amortization as the value of customer list divided by years left :

$100000/20 = $5000

The consolidated amount for buildings is the sum for both companies minus the over value and the amount already paid to amortization it has been 5 years from date of acquisition to end of 2018

$5,00,000+$1,40,000-$30,000+($3000×5)= $625000

The consolidated amount for equipment is the sum for both companies. book value for equipment in Company S is current and accounts for the undervalue and amortization.

Calculation of consolidated equipment:$200000+$250000

= $450000

The current customer list value is the original value minus the amortization up to the end of 2018. Five years have passed from the acquisition to the end of 2014. Calculation of customer list value as the original value minus the amortization times five:

$1,00,000-($5000×5)=$ 75,000

The common stock and additional paid-in capital values are the values for Company M. This method of accounting eliminates the shareholder’s equity

B)The different accounting methods only vary when balancing the amounts in between the two companies. The consolidated amounts will be the same no matter the method that is choosen

C)