Question

On January 1, 2018, Brooks Corporation exchanged $1,183,000 fair-value consideration for all of the outstanding voting stock of Chandler, Inc. At the acquisition date, Chandler had a book value equal to $1,105,000. Chandler’s individual assets and liabilities had fair values equal to their respective book values except for the patented technology account, which was undervalued by $204,000 with an estimated remaining life of six years. The Chandler acquisition was Brooks’s only business combination for the year.

In case expected synergies did not materialize, Brooks Corporation wished to prepare for a potential future spin-off of Chandler, Inc. Therefore, Brooks had Chandler maintain its separate incorporation and independent accounting infor-mation system as elements of continuing value.

On December 31, 2018, each company submitted the following financial statements for consolidation. Dividends were declared and paid in the same period. Parentheses indicated credit balances.

	Brooks Corp.	Chandler Inc.
Income Statement
Revenues	$   (640,000)	$   (587,000)
Cost of goods sold	255,000	203,000
Gain on bargain purchase	(126,000)	–0–
Depreciation and amortization	150,000	151,000
Equity earnings from Chandler	(199,000)	–0–
Net income	$   (560,000)	$   (233,000)
Statement of Retained Earnings
Retained earnings, 1/1	$(1,835,000)	$   (805,000)
Net income (above)	(560,000)	(233,000)
Dividends declared	100,000	40,000
Retained earnings, 12/31	$(2,295,000)	$   (998,000)
Balance Sheet
Current assets	$     343,000	$     432,000
Investment in Chandler	1,468,000	–0–
Trademarks	134,000	221,000
Patented technology	395,000	410,000
Equipment	693,000	341,000
Total assets	$  3,033,000	$  1,404,000
Liabilities	$   (203,000)	$   (106,000)
Common stock	(535,000)	(300,000)
Retained earnings, 12/31	(2,295,000)	(998,000)
Total liabilities and equity	$(3,033,000)	$(1,404,000)

1. Show how Brooks determined the following account balances:

   • Gain on bargain purchase.

   • Earnings from Chandler.

   • Investment in Chandler.

2. Prepare a December 31, 2018, consolidated worksheet for Brooks and Chandler.

Answer 1

Part a. Acquisition-date fair value allocation and annual excess amortization
Consideration transferred	$ 1,183,000
Chandler book value	1,105,000
Technology undervaluation	204,000
Acquisition fair value of net assets	1,309,000
Gain on bargain purchase	$ (126,000)
	Correct!
Chandler net income	$ (233,000)
Technology amortization	34,000
Equity earnings in Chandler	$ (199,000)
	Correct!
Fair value of net assets at acquisition-date	$ 1,309,000
Equity earnings from Chandler	199,000
Dividends declared	(40,000)
Investment in Chandler 12/31/18	$ 1,468,000
				Correct!

Explanatory comments:   

Because a bargain purchase occurred, Chandler's net asset fair value replaces the fair value of the consideration transferred as the initial value assigned to the subsidiary on the books of the parent, Brooks.

Part b. Consolidated Worksheet
BROOKS AND CONSOLIDATED SUBSIDIARY
Consolidation Worksheet
For Year Ending December 31, 2018
			Adjustments & Eliminations
	Brooks	Chandler		Debit		Credit	Consolidated
Income Statement							-
Revenues	(640,000)	(587,000)					(1,227,000)	Correct!
Cost of goods sold	255,000	203,000					458,000	Correct!
Gain on bargain purchase	(126,000)	-					(126,000)	Correct!
Depreciation and amortization	150,000	151,000	[E]	34,000			335,000	Correct!
Equity earnings in Chandler	(199,000)	-	[ I ]	199,000			-	Correct!
Net income	(560,000)	(233,000)					(560,000)	Correct!
Statement of Retained Earnings
Retained earnings, 1/1	(1,835,000)	(805,000)	[S]	805,000			(1,835,000)	Correct!
Net income	(560,000)	(233,000)					(560,000)	Correct!
Dividends declared	100,000	40,000			[D]	40,000	100,000	Correct!
Retained earnings, 12/31	(2,295,000)	(998,000)					(2,295,000)	Correct!
Balance Sheet
Current assets	343,000	432,000					775,000	Correct!
Investment in Chandler	1,468,000	-	[D]	40,000	[ I ]	199,000
					[S]	1,105,000
					[A]	204,000	-	Correct!
Trademarks	134,000	221,000					355,000	Correct!
Patented technology	395,000	410,000	[A]	204,000	[E]	34,000	975,000	Correct!
Equipment	693,000	341,000					1,034,000	Correct!
Total assets	3,033,000	1,404,000					3,139,000	Correct!
Liabilities	(203,000)	(106,000)					(309,000)	Correct!
Common stock	(535,000)	(300,000)	[S]	300,000			(535,000)	Correct!
Retained earnings, 12/31	(2,295,000)	(998,000)					(2,295,000)	Correct!
Total liabilities and equity	(3,033,000)	(1,404,000)		1,582,000		1,582,000	(3,139,000)	Correct!
				Correct!		Correct!
Parentheses indicate a credit balance.