Question

On January 1, 2021, Waddington Company acquired Middleton Co. by issuing 55,000 shares of its common Stock with a market value of $20 per share. A building on sub’s books was undervalued by $100,000, resulting in annual amortization of $10,000. Also, there was an unrecorded customer list valued at $150,000, resulting in annual amortization of $15,000; as well as a 10-year franchise agreement valued at $125,000. The separate 2021 financial statements for Waddington and Middleton follow.

	Waddington	Middleton
Sales revenue	$3,600,000	$ 975,000
Cost of goods sold	(2,520,000)	(585,000)
Gross profit	1,080,000	390,000
Operating expenses	(684,000)	(253,500)
Equity income	99,000	_
Net Income	$ 495,000	$ 136,500
Retained Earnings, 1/1/21	$1,830,500	$ 503,750
Net income	495,000	136,500
Dividends	(32,040)	(20,475)
Retained Earnings, 12/31/21	$2,293,460	$ 619,775
Cash and receivables	$ 772,275	$ 477,425
Inventory	698,400	290,550
Equity investment	1,178,525
Property, plant & equipment (Net)	3,719,520	537,550
Total Assets	$6,368,720	$1,305,525
Accounts payable	$ 263,520	$ 92,950
Accrued liabilities	313,200	121,550
Notes payable	1,250,000	325,000
Common stock	407,000	65,000
Additional paid-in capital	1,824,040	81,250
Retained Earnings, 12/31/11	2,293,400	619,775
Total Liabilities and Equities	$6,368,720	$1,305,525

1. Prepare FV allocation schedule

b. Prepare all necessary consolidation entries for 2021 consolidated financial statements.

3. Now assume that at year-end a goodwill impairment test is conducted before the consolidated statements are issued. The estimated fair value of the subsidiary is $1,100,000. The fair value of the identifiable net assets is $1,050,000. Prepare any journal entries resulting from the test.

Answer 1

Answer :

(a) Fair value allocation schedule

Share held by	$65,000
% Held	$1
Book value of Net Assets acquired	-
Common stock	$65,000
Additional paid in capital	$81,250
Retained earning	$5,03,750
Implied value (20*55000)/65000*55000	$13,00,000
Difference	-
Less : Increase in fair value of assets	-
Building	$1,00,000
Customer List	$1,50,000
Franchise Agreements	$1,25,000
Good will (Balancing figure)	$3,56,250

(b).Work sheet entries for year th eyear ended 31.Dec.2021

(1)	(1) Elimination of subsidiary income reported by parent	-	-
	Equity in income of Middleton	$1,36,500	-
	Investment in share of Middleton	-	$1,36,500
(2)	Elimination of dividend paid waddington	-	-
	Investements in share of Middleton	$20,475	-
	Dividnedn paid	-	$20,475
(3)	Elimination of subsidary Equity	-	-
	Common stock - Middleton	$65,000	-
	Additional paid in capital	$81,250	-
	Retained earning - Middleton	$5,03,750	-
	Investment in share of Middleton	-	$6,50,000
(4).	Recording assets at fair value in consolidated financial statement	-	-
	Entry	-	-
	Building	$1,00,000	-
	Customer List	$1,50,000	-
	Franchise Agreement	$1,25,000	-
	Good will	$3,56,250	-
	Investment in share of Middleton	-	$7,31,250
(5)	Allocation of income statement effect of Amortization	-	-
	Income / Expense	-	-
	Amortization	-	-
	Builsing	$10,000	-
	Customer list	$15,000	-
	Franchise	$12,500	-
	Total	$37,500	-
	Entries	-	-
	Amortization	$37,500	-
	Accumulated Amortization	-	$37,500
	Investment in share of Middleton	$37,500	-
	Amortization	-	$37,500

(c). An asset is impaired when it carrying amount exveeds its recoverabel amount. Indication of impairment- if the carrying amount of the investment in the separate financial statements exceeds the carrying amounts in the consolidated financial statements of the investee's net assets including associated goodwill

It's given	-
Carrying amount of investments in Middleton	$11,00,000
Fair value of identifiable assets of Middleton	$10,50,000

Since carrying amount of investment in Middleton is exceed its fair value of net identifiable assets hence investment in Middleton required is be imapired

Impairment loss is ($1100000 - $1050000) = $50000

Impairment loss $50000 shall be allocated goodwill amount first consolidated financial statement.

Journal Entries

Imapirment loss	$50,000	-
Investment in share of Middleton	-	$50,000