Question

Parker, Inc., acquires 70 percent of Sawyer Company for $420,000. The remaining 30 percent of Sawyer’s outstanding shares continue to trade at a collective value of $174,000. On the acquisition date, Sawyer has the following accounts: Book Value Fair Value Current assets $ 210,000 $ 210,000 Land 170,000 180,000 Buildings 300,000 330,000 Liabilities (280,000 ) (280,000 ) The buildings have a 10-year remaining life. In addition, Sawyer holds a patent worth $140,000 that has a five-year remaining life but is not recorded on its financial records. At the end of the year, the two companies report the following balances: Parker Sawyer Revenues $ (900,000 ) $ (600,000 ) Expenses 600,000 400,000 Assume that the acquisition took place on January 1. What figures would appear in a consolidated income statement for this year? Assume that the acquisition took place on April 1. Sawyer’s revenues and expenses occurred uniformly throughout the year. What amounts would appear in a consolidated income statement for this year?

Answer 1

Part A

Acquisition-date total fair value ..........................$594,000

Book value of net assets.......................................(400,000)

Fair value in excess of book value .....................$194,000

Excess fair value assigned to specific accounts based on fair value		Remaining Life	Annual excess amortizations
Patent	140000	5	28000
Land	10000
Buildings	30000	10	3000
Goodwill	14000
Total	0		31000

Consolidated figures following January 1 acquisition date:

Combined revenues ..............................................................................$1,500,000

Combined expenses...............................................................................(1,031,000)

Consolidated net income.......................................................................469,000

NCI in Sawyer’s income ([200,000 – 31,000] × 30%)..........................(50,700)

Controlling interest in consolidated net income ...............................$418,300

Part B

. Consolidated figures following April 1 acquisition date:

Combined revenues . ........................................................................ $1,350,000

Combined expenses . ....................................................................... (923,250)

Consolidated net income . ............................................................... $ 426,750

Net income attributable to noncontrolling interest .... . ...................... (38,025)

Net income attributable to Parker, Inc . ............................................ $ 388,725

Explanation

$900,000 Parker revenues plus $450,000 (600000*9/12) of post-acquisition Sawyer revenues = 1350000

$600,000 Parker expenses plus $300,000 (400000*9/12) of post-acquisition Sawyer expenses plus $23,250 amortization expenses for 9 months (31000*9/12) = 923250

($200,000 – 31,000) adjusted subsidiary net income × 30% × ¾ year = 38025

200000 is derived from revenue of subsidiary of 600000 - expenses of subsidiary of 400000