Question

On January 1, 2018, Brooks Corporation exchanged $1,183,000 fair-value consideration for all of the outstanding voting stock of Chandler, Inc. At the acquisition date, Chandler had a book value equal to $1,105,000. 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 $204,000 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, 2018, each company submitted the following financial statements for consolidation. Dividends were declared and paid in the same period.

Income Statement
Revenues	$	(640,000	)		$	(587,000	)
Cost of goods sold		255,000				203,000
Gain on bargain purchase		(126,000	)			0
Depreciation and amortization		150,000				151,000
Equity earnings from Chandler		(199,000	)			0
Net income	$	(560,000	)		$	(233,000	)
Statement of Retained Earnings
Retained earnings, 1/1	$	(1,835,000	)		$	(805,000	)
Net income (above)		(560,000	)			(233,000	)
Dividends declared		100,000				40,000
Retained earnings, 12/31	$	(2,295,000	)		$	(998,000	)
Balance Sheet
Current assets	$	343,000			$	432,000
Investment in Chandler		1,468,000				0
Trademarks		134,000				221,000
Patented technology		395,000				410,000
Equipment		693,000				341,000
Total assets	$	3,033,000			$	1,404,000
Liabilities	$	(203,000	)		$	(106,000	)
Common stock		(535,000	)			(300,000	)
Retained earnings, 12/31		(2,295,000	)			(998,000	)
Total liabilities and equity	$	(3,033,000	)		$	(1,404,000	)

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, 2018, consolidated worksheet for Brooks and Chandler

Answer 1

a.

Gain on bargain purchase
Particulars	Amount $
Purchase Consideration (i.e., full value of Consideration)	$1,183,000
Less:Fair values of Individual assets and liabilities ($ 1,105,000+ $ 204,000) (i.e., all the assets book values are similar to fair valus except one asset)	$1,309,000
Gain on bargain purchase	$ 126,000

As per given information Equity earnings from CHandler was $ 199,000

Dividend declared by chandler is income to Brooks, Dividend income = $ 40,000 and net income after declaration of dividend is also belongs to brooks, the holding company.

Actual Investment at the time of purchase of chandler stock was $ 1,183,000 whereas as per books of accouts the balance value of investment including net income income of chandler for the year was $ 1,468,000.

b.

Consolidated worksheet for Brooks and Chandler
Income Statement
Particulars	Brooks	Chandler	Total
Revenues	640000	587000	1227000
Cost of goods sold	255000	203000	458000
Gain on bargain purchase	126000	0	126000
Depreciation and amortization	150000	151000	301000
Equity earnings from Chandler	199000	0	199000
Net Income	560000	233000	793000
Statement of Retained Earnings
Retained earnings, 1/1	1835000	805000	2640000
Net income (above)	560000	233000	793000
Dividends declared	100000	40000	140000
Retained earnings, 12/31	2295000	998000	3293000
Balance Sheet
Current Assets	343000	432000	775000
Trade marks	134000	221000	355000
Patents	395000	410000	805000
Equipment	693000	341000	1034000
Total Assets	1565000	1404000	2969000
Liabilities	203000	106000	309000
Common Stock	535000	0	535000
Retained Earnings	2125000		2125000
Total Liabilities and Equity	1565000	1404000	2969000

Negative figures indicates credit balances