Question

On January 1, 2021, Brooks Corporation exchanged $1,193,000 fair-value consideration for all of the outstanding voting stock of Chandler, Inc. At the acquisition date, Chandler had a book value equal to $980,000. 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 $348,000 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 information system as elements of continuing value.

On December 31, 2021, each company submitted the following financial statements for consolidation. Dividends were declared and paid in the same period.

	Brooks Corp.				Chandler Inc.
Income Statement
Revenues	$	(629,000	)		$	(577,000	)
Cost of goods sold		189,000				175,000
Gain on bargain purchase		(135,000	)			0
Depreciation and amortization		147,000				157,000
Equity earnings from Chandler		(187,000	)			0
Net income	$	(615,000	)		$	(245,000	)
Statement of Retained Earnings
Retained earnings, 1/1	$	(1,670,000	)		$	(680,000	)
Net income (above)		(615,000	)			(245,000	)
Dividends declared		100,000				40,000
Retained earnings, 12/31	$	(2,185,000	)		$	(885,000	)
Balance Sheet
Current assets	$	264,000			$	310,000
Investment in Chandler		1,475,000				0
Trademarks		179,000				214,000
Patented technology		359,000				415,000
Equipment		653,000				384,000
Total assets	$	2,930,000			$	1,323,000
Liabilities	$	(210,000	)		$	(138,000	)
Common stock		(535,000	)			(300,000	)
Retained earnings, 12/31		(2,185,000	)			(885,000	)
Total liabilities and equity	$	(2,930,000	)		$	(1,323,000	)

Note: Parentheses indicate a credit balance.

a. Determine the following account balances:

• Gain on bargain purchase.
• Earnings from Chandler.
• Investment in Chandler.

b. Prepare a December 31, 2021, consolidated worksheet for Brooks and Chandler.

Answer 1

Part a.) Acquisition-date fair value allocation and annual excess amortization

Consideration transferred		1,193,000
Chandler book value (given)	980,000
Technology undervaluation (6 yr. life)	348,000
Acquisition-date fair value of net assets		(1,328,000)
Gain on bargain purchase		(135,000)

Chandler net income		245,000
Less:Technology amortization (348000/6)		58,000
Equity earnings in Chandler		187,000

Fair value of net assets at acquisition-date		1,328,000
Equity earnings from Chandler		187,000
Dividends declared		(40,000)
Investment in Chandler 12/31		1,475,000

Part b.)  Consolidated worksheet for Brooks and Chandler:-

BROOKS AND CHANDLER
Consolidated Worksheet
For the year ending December 31, 2021
Income Statement	Brooks	Chandler	Consolidation Entries	Consolidated
			Debit	Credit
Revenues	$    (629,000)	$    (577,000)			$ (1,206,000)
Cost of goods sold	$     189,000	$     175,000			$     364,000
Gain on bargain purchase	$    (135,000)	$               -			$    (135,000)
Depreciation and amortization	$     147,000	$     157,000	$                       58,000		$     362,000
Equity earnings in Chandler	$    (187,000)	$               -	$                     187,000		$               -
Net income	$    (615,000)	$    (245,000)			$    (615,000)
Statement of Retained Earnings
Retained earnings, 1/1	$ (1,670,000)	$    (680,000)	$                     680,000		$ (1,670,000)
Net income	$    (615,000)	$    (245,000)			$    (615,000)
Dividends declared	$     100,000	$       40,000		$         40,000	$     100,000
Retained earnings, 12/31	$ (2,185,000)	$    (885,000)			$ (2,185,000)
Balance Sheet
Current assets	$     264,000	$     310,000			$     574,000
Investment in Chandler	$ 1,475,000	$               -	$                       40,000	$    1,515,000	$               -
Trademarks	$     179,000	$     214,000			$     393,000
Patented technology	$     359,000	$     415,000	$                     348,000	$         58,000	$ 1,064,000
Equipment	$     653,000	$     384,000			$ 1,037,000
Total assets	$ 2,930,000	$ 1,323,000			$ 3,068,000
Liabilities	$    (210,000)	$    (138,000)			$    (348,000)
Common stock	$    (535,000)	$    (300,000)	$                     300,000		$    (535,000)
Retained earnings, 12/31	$ (2,185,000)	$    (885,000)			$ (2,185,000)
Total liabilities and equity	$ (2,930,000)	$ (1,323,000)	$                  1,582,000	$    1,582,000	$ (3,068,000)

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