Question

The Holtz Corporation acquired 80 percent of the 100,000 outstanding voting shares of Devine, Inc., for $6.30 per share on January 1, 2017. The remaining 20 percent of Devine’s shares also traded actively at $6.30 per share before and after Holtz’s acquisition. An appraisal made on that date determined that all book values appropriately reflected the fair values of Devine’s underlying accounts except that a building with a 5-year future life was undervalued by $45,000 and a fully amortized trademark with an estimated 10-year remaining life had a $60,000 fair value. At the acquisition date, Devine reported common stock of $100,000 and a retained earnings balance of $280,000.

Following are the separate financial statements for the year ending December 31, 2018:

	Holtz Corporation				Devine, Inc.
Sales	$	(584,000	)		$	(250,000	)
Cost of goods sold		194,000				95,000
Operating expenses		246,000				65,000
Dividend income		(16,000	)			0
Net income	$	(160,000	)		$	(90,000	)
Retained earnings, 1/1/18	$	(700,000	)		$	(350,000	)
Net income (above)		(160,000	)			(90,000	)
Dividends declared		70,000				20,000
Retained earnings, 12/31/18	$	(790,000	)		$	(420,000	)
Current assets	$	296,000			$	191,000
Investment in Devine, Inc		504,000				0
Buildings and equipment (net)		680,000				390,000
Trademarks		100,000				144,000
Total assets	$	1,580,000			$	725,000
Liabilities	$	(470,000	)		$	(205,000	)
Common stock		(320,000	)			(100,000	)
Retained earnings, 12/31/18 (above)		(790,000	)			(420,000	)
Total liabilities and equities	$	(1,580,000	)		$	(725,000	)

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

1. Prepare a worksheet to consolidate these two companies as of December 31, 2018.

2. Prepare a 2018 consolidated income statement for Holtz and Devine.

3. If instead the noncontrolling interest shares of Devine had traded for $4.85 surrounding Holtz’s acquisition date, what is the impact on goodwill?

Answer 1

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Part a
Fair Value Allocation and Amortization
Consideration transferred by Krause	80,000*$6.30	$        504,000
Noncontrolling interest fair value	20,000*$6.30	$        126,000
Leahy total fair value 1/1/18		$        630,000
Leahy book value 1/1/18		$      (380,000)
Fair value in excess of book value		$        250,000
			Life	Amortizations
Excess price allocated to undervalued
Building		$           45,000	5 years	$                      9,000
Trademark		$           60,000	10 years	$                      6,000
Goodwill		$        145,000	indefinite	$                             -
		$        250,000		$                   15,000
	Holtz Corp	Devine Inc	Consolidation Entries		Noncontrolling	Consolidated
Accounts			Debit	Credit	Interest	Totals
Sales	$         (584,000)	$      (250,000)				$              (834,000)
Cost of goods sold	$            194,000	$           95,000				$                 289,000
Operating expenses	$            246,000	$           65,000	(E)   15,000			$                 326,000
Dividend income	$            (16,000)	$                    -	(I)   16,000			$                            -
Separate company net income	$         (160,000)	$        (90,000)
Consolidated net income						$                 219,000
NCI in Devine's income					$                   (15,000)	$                   15,000
Holtz's interest in consolidated income						$              (204,000)
Retained earnings, 1/1	$         (700,000)	$      (350,000)	(S) 350,000	(*C) 44,000		$              (744,000)
Net income (above)	$         (160,000)	$        (90,000)				$              (204,000)
Dividends paid	$              70,000	$           20,000		(I)    16,000	$                       4,000	$                   70,000
Retained earnings, 12/31	$         (790,000)	$      (420,000)				$              (878,000)
Current assets	$            296,000	$        191,000				$                 487,000
Investment in Devine Inc	$            504,000		(*C) 44,000	(S)360,000		$                            -
				(A)188,000
Buildings and equipment (net)	$            680,000	$        390,000	(A) 36,000	(E)    9,000		$             1,097,000
Trademarks	$            100,000	$        144,000	(A) 54,000	(E)    6,000		$                 292,000
Goodwill	$                       -		$                   -	(A)145,000		$                 145,000
Total assets	$        1,580,000	$        725,000				$             2,021,000
Liabilities	$         (470,000)	$      (205,000)				$              (675,000)
Common stock	$         (320,000)	$      (100,000)	(S)100,000			$              (320,000)
Retained earnings, 12/31 (above)	$         (790,000)	$      (420,000)				$              (878,000)
NCI in Devine, 1/1				(S)   90,000
				(A)   47,000	$                (137,000)
NCI in Devine, 12/31					$                (148,000)	$              (148,000)
Total liabilities and equities	$      (1,580,000)	$      (725,000)				$           (2,021,000)
Part b
Sales		$        834,000
Cost of goods sold	$            289,000
Operating expenses	$            326,000
Total expenses		$        615,000
Consolidated net income		$        219,000
To 20% Noncontrolling interest		$           15,000
To controlling interest		$        204,000
Part c
Consideration transferred by Krause for 80% of Divine	$            504,000
Add: Noncontrolling interest fair value ($4.85 × 20,000 shares)	$              97,000
Divine fair value	$            601,000
Less: Fair value of Divine’s underlying net assets	$            485,000
Goodwill	$            116,000
If the Noncontrolling interest fair value was $4.85 per share at the acquisition date, then goodwill declines to $116,000.