Herbert, Inc., acquired all of Rambis Company’s outstanding stock on January 1, 2020, for $599,000 in cash. Annual excess amortization of $17,000 results from this transaction. On the date of the takeover, Herbert reported retained earnings of $486,000, and Rambis reported a $220,000 balance. Herbert reported internal net income of $41,000 in 2020 and $55,600 in 2021 and declared $10,000 in dividends each year. Rambis reported net income of $27,500 in 2020 and $42,100 in 2021 and declared $5,000 in dividends each year.
a. Assume that Herbert’s internal net income figures above do not include any income from the subsidiary.
| Amounts | |
| Consolidated retained earnings (equity method) | |
| Consolidated retained earnings (initial value method) | |
| Consolidated retained earnings (partial equity methdo) |
b. Under each of the following situations, what is the Investment in Rambis account balance on Herbert’s books on January 1, 2021?
| Investment | |
| Equity method | |
| Partial equity method | |
| Initial value method |
c. Under each of the following situations, what is Entry *C on a 2021 consolidation worksheet?
In: Accounting
On December 31, 2020, Gibbs Co. acquired bonds issued by Walden Co. for $112,290. They have a face amount of $100,000, pay 12% interest, and were purchased to yield 10%. The maturity date is December 31, 2030, and interest is due every December 31. The fair value of the bonds on December 31, 2021, is $108,500. Required: (1) Complete the amortization schedule through the first interest payment on December 31, 2021. (2) Prepare the journal entry(ies) that Gibbs would make on December 31, 2021, assuming the company will sell the bonds if it needs cash at any time before December 31, 2030.
In: Accounting
On January 1, 2020, Corgan Company acquired 80 percent of the outstanding voting stock of Smashing, Inc., for a total of $1,600,000 in cash and other consideration. At the acquisition date, Smashing had common stock of $910,000, retained earnings of $460,000, and a noncontrolling interest fair value of $400,000. Corgan attributed the excess of fair value over Smashing's book value to various covenants with a 20-year remaining life. Corgan uses the equity method to account for its investment in Smashing.
During the next two years, Smashing reported the following:
| Net Income | Dividends Declared | Inventory Purchases from Corgan | |||||||
| 2020 | $ | 360,000 | $ | 56,000 | $ | 310,000 | |||
| 2021 | 340,000 | 66,000 | 330,000 | ||||||
Corgan sells inventory to Smashing using a 60 percent markup on cost. At the end of 2020 and 2021, 50 percent of the current year purchases remain in Smashing's inventory.
In: Accounting
Heidebrecht Design acquired 30% of the outstanding common stock of Blossom Company on January 1, 2020, by paying $844,000 for the 42,200 shares. Blossom declared and paid $0.20 per share cash dividends on March 15, June 15, September 15, and December 15, 2020. Blossom reported net income of $381,500 for the year. At December 31, 2020, the market price of Blossom common stock was $26 per share.
Prepare the journal entries for Heidebrecht Design for 2020 assuming Heidebrecht Design cannot exercise significant influence over Blossom. (Record journal entries in the order presented in the problem. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts.)
|
Date |
Account Titles and Explanation |
Debit |
Credit |
|---|---|---|---|
|
choose a transaction date Jan. 1Mar. 15June 15Sept. 15Dec. 15Dec. 31 |
enter an account title |
enter a debit amount |
enter a credit amount |
|
enter an account title |
enter a debit amount |
enter a credit amount |
|
|
choose a transaction date Jan. 1Mar. 15June 15Sept. 15Dec. 15Dec. 31 |
enter an account title |
enter a debit amount |
enter a credit amount |
|
enter an account title |
enter a debit amount |
enter a credit amount |
|
|
choose a transaction date Jan. 1Mar. 15June 15Sept. 15Dec. 15Dec. 31 |
enter an account title |
enter a debit amount |
enter a credit amount |
|
enter an account title |
enter a debit amount |
enter a credit amount |
|
|
choose a transaction date Jan. 1Mar. 15June 15Sept. 15Dec. 15Dec. 31 |
enter an account title |
enter a debit amount |
enter a credit amount |
|
enter an account title |
enter a debit amount |
enter a credit amount |
|
|
choose a transaction date Jan. 1Mar. 15June 15Sept. 15Dec. 15Dec. 31 |
enter an account title |
enter a debit amount |
enter a credit amount |
|
enter an account title |
enter a debit amount |
enter a credit amount |
|
|
choose a transaction date Jan. 1Mar. 15June 15Sept. 15Dec. 15Dec. 31 |
enter an account title |
enter a debit amount |
enter a credit amount |
|
enter an account title |
enter a debit amount |
enter a credit amount |
eTextbook and Media
List of Accounts
Prepare the journal entries for Heidebrecht Design for 2020, assuming Heidebrecht Design can exercise significant influence over Blossom. Use the equity method. (Record journal entries in the order presented in the problem. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts.)
|
Date |
Account Titles and Explanation |
Debit |
Credit |
|---|---|---|---|
|
choose a transaction date Jan. 1Mar. 15June 15Sept. 15Dec. 15Dec. 31 |
enter an account title |
enter a debit amount |
enter a credit amount |
|
enter an account title |
enter a debit amount |
enter a credit amount |
|
|
choose a transaction date Jan. 1Mar. 15June 15Sept. 15Dec. 15Dec. 31 |
enter an account title |
enter a debit amount |
enter a credit amount |
|
enter an account title |
enter a debit amount |
enter a credit amount |
|
|
choose a transaction date Jan. 1Mar. 15June 15Sept. 15Dec. 15Dec. 31 |
enter an account title |
enter a debit amount |
enter a credit amount |
|
enter an account title |
enter a debit amount |
enter a credit amount |
|
|
choose a transaction date Jan. 1Mar. 15June 15Sept. 15Dec. 15Dec. 31 |
enter an account title |
enter a debit amount |
enter a credit amount |
|
enter an account title |
enter a debit amount |
enter a credit amount |
|
|
choose a transaction date Jan. 1Mar. 15June 15Sept. 15Dec. 15Dec. 31 |
enter an account title |
enter a debit amount |
enter a credit amount |
|
enter an account title |
enter a debit amount |
enter a credit amount |
|
|
choose a transaction date Jan. 1Mar. 15June 15Sept. 15Dec. 15Dec. 31 |
enter an account title |
enter a debit amount |
enter a credit amount |
|
enter an account title |
enter a debit amount |
enter a credit amount |
eTextbook and Media
List of Accounts
Indicate the balance sheet and income statement account balances at December 31, 2020, under each method of accounting.
|
Cost |
Equity |
|||
|---|---|---|---|---|
|
Stock Investments |
$enter a dollar amount | $enter a dollar amount | ||
|
Dividend revenue |
enter a dollar amount | enter a dollar amount | ||
|
Unrealized gain income |
enter a dollar amount | enter a dollar amount | ||
|
Revenue from stock investments |
enter a dollar amount | enter a dollar amount |
In: Accounting
On January 1, 2020, Corgan Company acquired 70 percent of the outstanding voting stock of Smashing, Inc., for a total of $1,225,000 in cash and other consideration. At the acquisition date, Smashing had common stock of $860,000, retained earnings of $410,000, and a noncontrolling interest fair value of $525,000. Corgan attributed the excess of fair value over Smashing's book value to various covenants with a 20-year remaining life. Corgan uses the equity method to account for its investment in Smashing.
During the next two years, Smashing reported the following:
| Net Income | Dividends Declared | Inventory Purchases from Corgan | |||||||
| 2020 | $ | 310,000 | $ | 51,000 | $ | 260,000 | |||
| 2021 | 290,000 | 61,000 | 280,000 | ||||||
Corgan sells inventory to Smashing using a 60 percent markup on cost. At the end of 2020 and 2021, 30 percent of the current year purchases remain in Smashing's inventory.
In: Accounting
On January 1, 2020, Ridge Road Company acquired 20 percent of the voting shares of Sauk Trail, Inc., for $2,800,000 in cash. Both companies provide commercial Internet support services but serve markets in different industries. Ridge Road made the investment to gain access to Sauk Trail’s board of directors and thus facilitate future cooperative agreements between the two firms. Ridge Road quickly obtained several seats on Sauk Trail’s board, which gave it the ability to significantly influence Sauk Trail’s operating and investing activities.
The January 1, 2020, carrying amounts and corresponding fair values for Sauk Trail’s assets and liabilities follow:
| Carrying Amount | Fair Value | |||||
| Cash and receivables | $ | 115,000 | $ | 115,000 | ||
| Computing equipment | 5,045,000 | 5,780,000 | ||||
| Patented technology | 105,000 | 4,010,000 | ||||
| Trademark | 155,000 | 2,010,000 | ||||
| Liabilities | (190,000 | ) | (190,000 | ) | ||
Also, as of January 1, 2020, Sauk Trail’s computing equipment had a seven-year remaining estimated useful life. The patented technology was estimated to have a four-year remaining useful life. The trademark's useful life was considered indefinite. Ridge Road attributed to goodwill any unidentified excess cost.
During the next two years, Sauk Trail reported the following net income and dividends:
| Net Income | Dividends Declared | |||||
| 2020 | $ | 1,810,000 | $ | 155,000 | ||
| 2021 | 1,995,000 | 165,000 | ||||
How much of Ridge Road’s $2,800,000 payment for Sauk Trail is attributable to goodwill?
What amount should Ridge Road report for its equity in Sauk Trail’s earnings on its income statements for 2020 and 2021?
What amount should Ridge Road report for its investment in Sauk Trail on its balance sheets at the end of 2020 and 2021?
In: Accounting
On January 1, 2020, Corgan Company acquired 70 percent of the outstanding voting stock of Smashing, Inc., for a total of $1,505,000 in cash and other consideration. At the acquisition date, Smashing had common stock of $940,000, retained earnings of $490,000, and a noncontrolling interest fair value of $645,000. Corgan attributed the excess of fair value over Smashing's book value to various covenants with a 20-year remaining life. Corgan uses the equity method to account for its investment in Smashing. During the next two years, Smashing reported the following: Net Income Dividends Declared Inventory Purchases from Corgan 2020 $ 390,000 $ 59,000 $ 340,000 2021 370,000 69,000 360,000 Corgan sells inventory to Smashing using a 60 percent markup on cost. At the end of 2020 and 2021, 50 percent of the current year purchases remain in Smashing's inventory. Compute the equity method balance in Corgan's Investment in Smashing, Inc., account as of December 31, 2021. Prepare the worksheet adjustments for the December 31, 2021, consolidation of Corgan and Smashing.
In: Accounting
On January 1, 2020, Ridge Road Company acquired 20 percent of the voting shares of Sauk Trail, Inc., for $3,200,000 in cash. Both companies provide commercial Internet support services but serve markets in different industries. Ridge Road made the investment to gain access to Sauk Trail’s board of directors and thus facilitate future cooperative agreements between the two firms. Ridge Road quickly obtained several seats on Sauk Trail’s board, which gave it the ability to significantly influence Sauk Trail’s operating and investing activities.
The January 1, 2020, carrying amounts and corresponding fair values for Sauk Trail’s assets and liabilities follow:
| Carrying Amount | Fair Value | |||||
| Cash and receivables | $ | 135,000 | $ | 135,000 | ||
| Computing equipment | 5,225,000 | 6,100,000 | ||||
| Patented technology | 125,000 | 4,050,000 | ||||
| Trademark | 175,000 | 2,050,000 | ||||
| Liabilities | (210,000 | ) | (210,000 | ) | ||
Also, as of January 1, 2020, Sauk Trail’s computing equipment had a seven-year remaining estimated useful life. The patented technology was estimated to have a four-year remaining useful life. The trademark's useful life was considered indefinite. Ridge Road attributed to goodwill any unidentified excess cost.
During the next two years, Sauk Trail reported the following net income and dividends:
| Net Income | Dividends Declared | |||||
| 2020 | $ | 1,850,000 | $ | 175,000 | ||
| 2021 | 2,035,000 | 185,000 | ||||
How much of Ridge Road’s $3,200,000 payment for Sauk Trail is attributable to goodwill?
What amount should Ridge Road report for its equity in Sauk Trail’s earnings on its income statements for 2020 and 2021?
What amount should Ridge Road report for its investment in Sauk Trail on its balance sheets at the end of 2020 and 2021?
In: Accounting
Allison Corporation acquired all of the outstanding voting stock of Mathias, Inc., on January 1, 2020, in exchange for $5,998,000 in cash. Allison intends to maintain Mathias as a wholly owned subsidiary. Both companies have December 31 fiscal year-ends. At the acquisition date, Mathias’s stockholders’ equity was $2,030,000 including retained earnings of $1,530,000.
At the acquisition date, Allison prepared the following fair-value allocation schedule for its newly acquired subsidiary:
| Consideration transferred | $ | 5,998,000 | |||||
| Mathias stockholders' equity | 2,030,000 | ||||||
| Excess fair over book value | $ | 3,968,000 | |||||
| to unpatented technology (8-year remaining life) | $ | 848,000 | |||||
| to patents (10-year remaining life) | 2,560,000 | ||||||
| to increase long-term debt (undervalued, 5-year remaining life) | (130,000 | ) | 3,278,000 | ||||
| Goodwill | $ | 690,000 | |||||
Post acquisition, Allison employs the equity method to account for its investment in Mathias. During the two years following the business combination, Mathias reports the following income and dividends:
| Income | Dividends | |||
| 2020 | $ | 468,750 | $ | 25,000 |
| 2021 | 937,500 | 50,000 | ||
No asset impairments have occurred since the acquisition date.
Individual financial statements for each company as of December 31, 2021, follow. Parentheses indicate credit balances. Dividends declared were paid in the same period
| Allison | Mathias | |||||
| Income Statement | ||||||
| Sales | $ | (6,520,000 | ) | $ | (3,930,000 | ) | |
| Cost of goods sold | 4,584,000 | 2,519,500 | |||||
| Depreciation expense | 905,000 | 295,000 | |||||
| Amortization expense | 445,000 | 112,000 | |||||
| Interest expense | 67,000 | 66,000 | |||||
| Equity earnings in Mathias | (601,500 | ) | 0 | ||||
| Net income | $ | (1,120,500 | ) | $ | (937,500 | ) |
| Statement of Retained Earnings | |||||||
| Retained earnings 1/1 | $ | (5,400,000 | ) | $ | (1,973,750 | ) | |
| Net income (above) | (1,120,500 | ) | (937,500 | ) | |||
| Dividends declared | 560,000 | 50,000 | |||||
| Retained earnings 12/31 | $ | (5,960,500 | ) | $ | (2,861,250 |
) |
| Balance Sheet | |||||||
| Cash | $ | 84,000 | $ | 152,000 | |||
| Accounts receivable | 980,000 | 240,000 | |||||
| Inventory | 1,760,000 | 815,000 | |||||
| Investment in Mathias | 6,657,250 | 0 | |||||
| Equipment (net) | 3,760,000 | 2,073,000 | |||||
| Patents | 110,000 | 0 | |||||
| Unpatented technology | 2,155,000 | 1,480,000 | |||||
| Goodwill | 446,000 | 0 | |||||
| Total assets | $ | 15,952,250 | $ | 4,760,000 |
| Accounts payable | $ | (791,750 | ) | $ | (198,750 | ) | |
| Long-term debt | (1,000,000 | ) | (1,200,000 | ) | |||
| Common stock | (8,200,000 | ) | (500,000 | ) | |||
| Retained earnings 12/31 | (5,960,500 | ) | (2,861,250 | ) |
Total liabilities and equity$(15,952,250) $(4,760,000)
1. Determine the fair value in excess of book value for Allison's acquisition date investment in Mathias.
2. Prepare a worksheet to determine the consolidated values to be reported on Allison’s financial statements.
In: Accounting
Corporate Finance management - MBA
why do we need to analyze the financial statement of
companies?
In: Finance