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Padre, Inc., buys 80 percent of the outstanding common stock of Sierra Corporation on January 1,...

Padre, Inc., buys 80 percent of the outstanding common stock of Sierra Corporation on January 1, 2018, for $736,960 cash. At the acquisition date, Sierra’s total fair value, including the noncontrolling interest, was assessed at $921,200 although Sierra’s book value was only $634,000. Also, several individual items on Sierra’s financial records had fair values that differed from their book values as follows:

Book Value Fair Value
Land $ 60,800 $ 237,800
Buildings and equipment (10-year remaining life) 301,000 268,000
Copyright (20-year remaining life) 177,000 305,000
Notes payable (due in 8 years) (229,000 ) (213,800 )

For internal reporting purposes, Padre, Inc., employs the equity method to account for this investment. The following account balances are for the year ending December 31, 2018, for both companies.

Padre Sierra
Revenues $ (1,476,500 ) $ (660,900 )
Cost of goods sold 725,000 428,000
Depreciation expense 352,000 14,200
Amortization expense 0 8,850
Interest expense 47,300 8,850
Equity in income of Sierra (156,800 ) 0
Net income $ (509,000 ) $ (201,000 )
Retained earnings, 1/1/18 $ (1,465,000 ) $ (474,000 )
Net income (509,000 ) (201,000 )
Dividends declared 260,000 65,000
Retained earnings, 12/31/18 $ (1,714,000 ) $ (610,000 )
Current assets $ 1,126,240 $ 730,250
Investment in Sierra 841,760 0
Land 346,000 60,800
Buildings and equipment (net) 890,000 286,800
Copyright 0 168,150
Total assets $ 3,204,000 $ 1,246,000
Accounts payable $ (247,000 ) $ (247,000 )
Notes payable (493,000 ) (229,000 )
Common stock (300,000 ) (100,000 )
Additional paid-in capital (450,000 ) (60,000 )
Retained earnings (above) (1,714,000 ) (610,000 )
Total liabilities and equities $ (3,204,000 ) $ (1,246,000 )

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

Using the acquisition method, prepare the worksheet to consolidate these two companies. (For accounts where multiple consolidation entries are required, combine all debit entries into one amount and enter this amount in the debit column of the worksheet. Similarly, combine all credit entries into one amount and enter this amount in the credit column of the worksheet. Amounts in the Debit and Credit columns should be entered as positive. Negative amounts for the Noncontrolling Interest and Consolidated Totals columns should be entered with a minus sign.)

Solutions

Expert Solution

Solution:-

Excess value of assets and liabilities acquried at the time of acquisition :-

Book Value Fair Value Difference of fair vaalue over book value
Land $60,800 $237,800 = 60,800 - 237,800 = - $177,000
Buildings and equipment (10-year remaining life) $301,000 $268,000

= 301,000 - 268,000

= $ 33,000

Copyright (20-year remaining life) $177,000 $305,000

= 177,000 - 305,000

= - $ 128000

Notes payable (due in 8 years) $229,000 $213,800

= 229,000 - 213,800

= $15,200

Total

= ( 60,800 +  301,000 + 177,000 ) - 229,000

=538,800 - 229,000

= $309,800

=( 237,800 + 268,000 +  305,000 ) - 213,800

= 810,800 - 213,800

= $597,000

= [( - 177,000) +  33,000 + (- 128000 )] - 15,200

= - $272,000 - 15,200

=- $ 287,200

Parent 80% Noncontrolling interest 20% Total
Purchase price $736,960

= $921,200 * 20%

= $184,240

= 736,960 + 184,240

= $921,200

Book value
Common stock

= 100,000 * 80%

= $80,000

= 100,000 * 20%

= $20,000

= 80,000 + 20,000

= $100,000

Additionl paid in capital

= $60,000 * 80%

= $48,000

= $60,000 * 20%

= $12,000

= 48,000 + 12,000

= $60,000

Retained earning beggining of year
Excess value paid over book vaalue
Excess value assigned over book value
land

= -177,000 * 80%

= - $141,160

= - 177,000 * 20%

= - $35,400

= - $177,000
Building and equipment

= 33,000 * 80%

= $26,400

= 33,000 * 20 %

= $6,600

$ 33,000
Copy right

= - $ 128000 * 80%

=- $102,400

= - - $ 128000 * 20%

= - $25,600

- $ 128000

Notes payable

= 15,200 * 80%

= $12,160

= $15,200 * 20%

= $304

$15,200
Remaining excess value

= {( - $141,160)+ (- $102,400) + ( 26,400 ) - 12,160 } -

= $

= {(- $35,400 ) + 6600 + (- $25,600) - 304} - = $

Depreciation , Amortization and interest expenses on excess value acquired :-


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