Question

Patrick Corporation acquired 100 percent of O’Brien Company’s outstanding common stock on January 1 for $711,300 in cash. O’Brien reported net assets with a carrying amount of $396,000 at that time. Some of O’Brien’s assets either were unrecorded (having been internally developed) or had fair values that differed from book values as follows:

	Book Values		Fair Values
Trademarks (indefinite life)	$	107,000	$	299,000
Customer relationships (5-year remaining life)		0		104,400
Equipment (10-year remaining life)		393,000		340,800

Any goodwill is considered to have an indefinite life with no impairment charges during the year.

The following are financial statements at the end of the first year for these two companies prepared from their separately maintained accounting systems. O’Brien declared and paid dividends in the same period. Credit balances are indicated by parentheses.

	Patrick				O'Brien
Revenues	$	(1,380,000	)		$	(704,000	)
Cost of goods sold		368,000				320,000
Depreciation expense		104,700				89,400
Amortization expense		36,800				0
Income from O'Brien		(278,940	)			0
Net income	$	(1,149,440	)		$	(294,600	)
Retained earnings 1/1	$	(794,000	)		$	(296,000	)
Net income		(1,149,440	)			(294,600	)
Dividends declared		166,000				104,000
Retained earnings 12/31	$	(1,777,440	)		$	(486,600	)
Cash	$	242,000			$	121,000
Receivables		338,000				57,900
Inventory		246,000				186,000
Investment in O'Brien		886,240				0
Trademarks		526,000				83,700
Customer relationships		0				0
Equipment (net)		928,000				281,000
Goodwill		0				0
Total assets	$	3,166,240			$	729,600
Liabilities	$	(988,800	)		$	(143,000	)
Common stock		(400,000	)			(100,000	)
Retained earnings 12/31		(1,777,440	)			(486,600	)
Total liabilities and equity	$	(3,166,240	)		$	(729,600	)

1. Which investment method did Patrick use to compute the $278,940 income from O'Brien?

2. Determine the totals to be reported for this business combination for the year ending December 31.

3. Verify the totals determined in part (b) by producing a consolidation worksheet for Patrick and O’Brien for the year ending December 31.

Determine the totals to be reported for this business combination for the year ending December 31. (Input all amounts as positive values.)

	Consolidated totals Revenues Cost of goods sold Amortization expense Depreciation expense Income from O'Brien Net income Retained earnings, 1/1 Dividends declared Retained earnings, 12/31 Cash Receivables Inventory Investment in O’Brien Trademarks Customer relationships Equipment (net) Goodwill Total assets Liabilities Common stock Retained earnings, 12/31 Total liabilities and equities

Verify the totals determined in part (b) by producing a consolidation worksheet for Patrick and O’Brien for the year ending December 31. (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. Input all amounts as positive values.)

Answer 1

Answer :

(a) Patrick used Equity method to compute the $278,940 income from O'Brien.

Determination of Totals to be reported for this business combination for the year ending December 31

	Consolidated totals
Revenues	2,084,000
Cost of goods sold	688,000
Amortization expense	188,880
Depreciation expense	57680
Income from O'Brien	0
Net income	1,149,440
Retained earnings, 1/1	794,000
Net income	1,149,440
Dividends declared	166,000
Retained earnings, 12/31	1,777,440
Cash	363,000
Receivables	395,900
Inventory	432,000
Investment in O’Brien	0
Trademarks	801,700
Customer relationships	83,520
Equipment (net)	1,162,020
Goodwill	71,100
Total assets	3,309,240
Liabilities	1,131,800
Common stock	400,000
Retained earnings, 12/31	1,777,440
Total liabilities and equities	3,309,240

(b) Preparation of Consolidated Worksheet

			Consolidation Entries	Consolidation Entries	Consolidated
Accounts	Patrick	O'Brien	Debit	Credit	Totals
Revenues	(1,380,000)	(704,000)			(2,084,000)
Cost of goods sold	368,000	320,000			688,000
Depreciation expense	104,700	89,400		5,220	188,880
Amortization expense	36,800	0	20,880		57,680
Income of O'Brien	(278,940)	0	278,940		-
Net income	(1,149,440)	(294,600)			(1,149,440)
Retained earnings, 1/1	(794,000)	(296,000)	296,000		(794,000)
Net income	(1,149,440)	(294,600)			(1,149,440)
Dividends paid	166,000	104,000		104,000	166,000
Retained earnings, 12/31	(1,777,440)	(486,600)			(1,777,440)
Cash	242,000	121,000			363,000
Receivables	338,000	57,900			395,900
Inventory	246,000	186,000			432,000
Investment in O'Brien	886,240	0		886,240	-
Trademarks	526,000	83,700	192,000		801,700
Customer relationships	0	0	104,400	20,880	83,520
Equipment (net)	928,000	281,000	5,220	52,200	1,162,020
Goodwill	0	0	71,100		71,100
Total assets	3,166,240	729,600			3,309,240
Liabilities	(988,800)	(143,000)			(1,131,800)
Common stock	(400,000)	(100,000)	100,000		(400,000)
Retained earnings	(1,777,440)	(486,600)			(1,777,440)
Total liabilities and equity	(3,166,240)	(729,600)	1,068,540	1,068,540	(3,309,240)

Notes : Calculations of Amounts for Elimination Enteries

Amortization Expense on Customer relationships = 104,400 / 5 = $20,880

Depreciation on Equipment = ( 393,000 - 340,800) / 10 = $5,220

Calculation of Goodwill
Carrying amount of assets at date of acquisition	396,000
Add : Increase of fair value of Trademark	192,000
Add : Increase of fair value of Customer relationship	104,400
Less : Decrease in fair value of Equipment	52,200
Total Fair value	640,200
Less :Consideration Paid	711,300
Goodwill	71,100