Question

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.)

Answer 1

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 :-