Question

The Holtz Corporation acquired 80 percent of the 100,000 outstanding voting shares of Devine, Inc., for $7.30 per share on January 1, 2017. The remaining 20 percent of Devine’s shares also traded actively at $7.30 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 $64,500 and a fully amortized trademark with an estimated 10-year remaining life had a $84,000 fair value. At the acquisition date, Devine reported common stock of $100,000 and a retained earnings balance of $333,500.

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

	Holtz Corporation				Devine, Inc.
Sales	$	(674,000	)		$	(340,250	)
Cost of goods sold		233,000				166,000
Operating expenses		275,000				83,250
Dividend income		(16,000	)			0
Net income	$	(182,000	)		$	(91,000	)
Retained earnings, 1/1/18	$	(783,000	)		$	(403,500	)
Net income (above)		(182,000	)			(91,000	)
Dividends declared		70,000				20,000
Retained earnings, 12/31/18	$	(895,000	)		$	(474,500	)
Current assets	$	301,000			$	196,500
Investment in Devine, Inc		584,000				0
Buildings and equipment (net)		825,000				423,000
Trademarks		115,000				181,000
Total assets	$	1,825,000			$	800,500
Liabilities	$	(610,000	)		$	(226,000	)
Common stock		(320,000	)			(100,000	)
Retained earnings, 12/31/18 (above)		(895,000	)			(474,500	)
Total liabilities and equities	$	(1,825,000	)		$	(800,500	)

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

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

Prepare a 2018 consolidated income statement for Holtz and Devine.

If instead the noncontrolling interest shares of Devine had traded for $5.82 surrounding Holtz’s acquisition date, what is the impact on goodwill?

Answer 1

Consolidated Income Statement as on December 31, 2018
		Holtz Corporation	Devine Inc.	Consolidated Total
		(A)	(B)	(C=A+B)
		$	$	$
Sales		674000	340250	1014250
Less:
Cost of goods sold		-233000	-166000	-399000
Gross Profit		441000	174250	615250
Operating expenses		-275000	-83250	-358250
Net Earnings from operations		166000	91000	257000
Add: Non-Operating Income
Dividend income		16000	0	16000
Net income before tax		182000	91000	273000
Consolidated Statement of financial position
as on December 31, 2018
		Holtz Corporation	Devine Inc.	Eliminations		Consolidated
				Debit	Credit
		$	$	$	$	$
Assets
Non Current Assets
Investment in Devine Inc		584000			-584000	0
Buildings and equipment (net)		825000	423000	64500		1312500
Trademarks		115000	181000	84000		380000
	1	1524000	604000			2128000
Current Assets		301000	196500			497500
	2	301000	196500			497500
Total Assets	1+2	1825000	800500	148500	-584000	2190000
Equity & Liabilities
Equity
Common Stock - Holtz		320000				320000
- Devine			100000	-100000		0
	3	320000	100000	-100000		320000
Retained earnings
Opening earnings		783000	403500			1186500
Add: Income from
consolidated statement		182000	91000			273000
Sub-total		965000	494500			1459500
Less: Dividends declared		-70000	-20000			-90000
Closing earnings	4	895000	474500	-484000		885500
Liabilities	5	610000	226000			836000
Accumulated other comprehensive
gain/loss					148500	148500
Total Equity & Liabilities	3+4+5	1825000	800500	-584000	148500	2190000
		0	0			0
Adjustments for fair value of assets of Divine Inc
			Fair Value	Unrealised Gain/Loss
Builing			64500	64500
Trademarks			84000	84000
Total			148500	148500
If after acquisiton, the share value of Divine Inc trades at $5.82 instead of $ 7.30, then a goodwill impairment or goodwill decline entry will have to be passed in the income statement
			Rate $	Investment
Original Investment		80000	7.3	584000	A
(80% of 100000 Divine Inc shares)
Share value after acquisiton		80000	5.82	465600	B
Goodwill impairment				-118400	A-B
Holtz Corporation must record $118400 as expense in its income statement