Question

Zigma purchased 100% of Standard for $450K on January 1st 2XX1. The information below is from the December 31, 2XX1 accounts. At the time of purchase all FMV of all assets and liabilities equal book value, except for the following Description Book Value Fair Value Building $100,000 $175,000 10 Year Life Inventory 10,000 20,000 2 month life Land 5,000 50,000 Any excess from the purchase price will be allocated to goodwill. Requirement: Prepare the appropriate elimination journal entries and complete the worksheet Zigma Standard Income Statement Sales 200,000 470,000 Other Expenses (90,000) (67,000) Depreciation (30,000) (20,000) Income from Standard 365,500 Net Income 445,500 383,000 Statement of Retained Earnings Beginning RE 175,000 150,000 Net Income 445,500 383,000 Less Dividends Declared (32,000) (30,000) Ending Retained Earnings 588,500 503,000 Balance Sheet Current Assets 143,000 285,000 Depreicable Assets 200,000 473,000 Accumulated Depreciation (120,000) (105,000) Investment in Standard 785,500 Land 105,000 5,000 Goodwill Total Assets 1,113,500 658,000 Current Liabilities 50,000 55,000 Long Term Liabilities 375,000 50,000 Common Stock 100,000 50,000 Retained Earnings 588,500 503,000 - - Total Liabilities and Equity 1,113,500 658,000

Answer 1

The Consolidated Balance Sheet (after adjustments) is as follows:

Zigma, as on December 31st, 2xx1

			Consolidation Entries
	Zigma	Standard	Debit	Credit	Consolidated	Note No.
Income Statement
Sales	200,000	470,000	0		670,000
Other Expenses	-90000	-67000	10000		-167,000	1(b)
Depreciation	-30000	-20000	7500		-57,500	1(a)
Income from Standard	365500	0	365500		0	2
Net Income	445500	383000	383000		445,500
Statement of Retained Earnings
Beginning RE	175000	150000	150000		175,000	3(a)
Net Income	445500	383000	383000		445,500	3(b)
Less Dividends Declared	-32000	-30000		30000	-32,000	3(c)
Ending Retained Earnings	588500	503000			588,500
Balance Sheet
Current Assets	143000	285000	10000		438,000	1(b)
Depreicable Assets	200000	473000	75000		748,000	1(a)
Accumulated Depreciation	-120000	-105000	7500		-232,500	1(a)
Investment in Standard	785500			785500	0	4
					0
Land	105000	5000	45000		155,000	1(c)
Goodwill			127500		127,500	5
Total Assets	1113500	658000			1236,000
Current Liabilities	50000	55000			105,000
Long Term Liabilities	375000	50000			425,000
Common Stock	100000	50000	50000		100,000	5
Retained Earnings	588500	503000	515500	30000	606,000	5
	-	-			0
Total Liabilities and Equity	1113500	658000			1236,000

Notes:

1. The question has mentioned that at the time of investment by Zigma in Standard Co. , the FMV of all the assets were equal to the liabilities, other than

Particulars	Book Value	FMV
Building	100000	175000	10 years life
Inventory	10000	20000
Land	5000	50000

For the assets mentioned above the following adjustments have been made:

a) The Value of Building will be increased in the Consolidated Balance Sheet (Net of Additional Depreciation, calculated at Straight Line Method i.e. 75,000 / 10 = 7500). Hence, the Depreciable Assets are increased (Debited) by 75,000 and the Accumulated Depreciation in increased (Debited) by 7500. Similarly, the Adjustment for Depreciation will be made in the income statement also.

b) The FMV of Inventory at the beginning of the year were 20,000 against book value of 10,000. This implied that the profit in the consolidated balance sheet in overvalued by 10,000. Hence, the Income Statement is Debited by 10,000. Similarly, the Current Assets (that include Inventory) have been increased (Debited) by 10,000.

c) The FMV of Land was 50,000 against book value of 5,000. Hence, the Land will be increased (Debited) by 45,000.

2. The Income Statement of Zigma includes income from Standard to the amount of $365,500. This will be adjusted by debiting the Income Statement by amount of 365,500.

3. a) The Retained Earning at the opening will be adjusted by Debiting the amount of 150,000.

b) The Consolidated Statement of Retained earnings will be debited by the amount of 383,000 i.e. (365,500+7,500+10,000). It means that Income from Standard, Additional Depreciation and Adjustment to inventory.

c) Further, the Dividend declared by Standard will be adjusted, since it is paid to the holding company Zigma. Credit of 30,000 will be adjusted here.

4. Investment in Standard will be adjusted here. Amount of 785,500 credited.

5. Now, calculating the amount of Goodwill. Goodwill is basically the excess of price paid over the net assets acquired by the company. Hence the following entry will be done to calculate the amount of Goodwill:

	Dr.	Cr.
Common Stock	50000
Retained Earnings	150000
Income from Standard	365500
Building	75000
Land	45000
Inventory	10000
Dividend Declared		30000
Investment in Standard		785500
Additional Depreciation		7500
Goodwill		127500

Similarly, Debit will be given to Common Stock (50,000) and Retained Earning (150,000+365,500 = 515,000). And Credit of 30,000 will be given for dividend.

And goodwill of 127,500 will be adjusted as Debit.