On April 1, Year 1, Company P purchased 85% of S Company for total consideration of $357,000, which included $30,000 of contingent consideration as measured according to GAAP at fair value. Each company has a December 31 year-end. The cost method is used to account for the investment in S. The income statements, balance sheets, and the statements of cash flows for relevant time periods are reported below along with consolidated numbers. On the acquisition date, land on Company S’s books is undervalued by $40,000. Any remaining excess of purchase price over fair value of net assets is attributed to goodwill. At the end of Year 1, Company S declared, but did not pay, a $30,000 dividend. The contingent consideration had increased in fair value to $36,600 as of December 31, Year 1. The financial statements are presented below.
Required:
1. Prepare the computation and allocation of difference between implied and book value acquired schedule on the date of acquisition.
2. Prepare the consolidated work paper for year 1.
3. Examine the consolidated statement of cash flows prepared using the indirect format.
Determine how the following amounts were computed and indicate the direction of the change in the account and the effect of the change on cash from operations.
a. Controlling interest in income, $148,620
b. Cash paid for acquisitions, $320,400
c. The change in accounts receivable, $15,300
d. The change in inventory, ($15,600)
e. The change in accounts and notes payable, $61,500
SOLUTION
1. CAD Schedule
Parent Non- Entire
Share Controlling Value
Share
Purchase price and implied value 357,000 63,000 420,000 *
Less: Book value of equity acquired:
Common stock 20,400 3,600 24,000
Other contributed capital 103,020 18,180 121,200
Retained earnings _______ _____ _______
284,070 50,130 334,200
Difference between implied and book value 72,930 12,870 85,800
Allocated to undervalued land (34,000) (6,000) (40,000)
Goodwill 38,930 6,870 45,800
*$357,000/.85 = $420,000
2.
| P Company and Subsidiary | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Consolidated Statements Workpaper | |||||||||
| For the Year Ended December 31, Year 1 | |||||||||
| Eliminating Entries | Eliminating Entries | Eliminating Entries | |||||||
| P Company | S Company | Dr. | Cr. | Cr. | Non controlling Interest | Consolidated Balance | |||
| Income Statement | |||||||||
| Sales | 1,260,000 | 585,000 | 1,845,000 | ||||||
| Dividend Income | 25,500 | - | a | 25,500 | |||||
| Total Revenue | 1,285,500 | 585,000 | 1,845,000 | ||||||
| Cost of Goods Sold | 924,000 | 339,300 | 1,263,300 | ||||||
| Selling, General & Administration | 192,000 | 132,000 | 324,000 | ||||||
| Other Expenses (income) | 57,600 | 40,500 | 98,100 | ||||||
| Total Cost and Expense | 1,173,600 | 511,800 | 1,685,400 | ||||||
| Net Income | 111,900 | 73,200 | 159,600 | ||||||
| Non controlling Interest | *10,980 | (10,980) | |||||||
| Net Income to Retained Earnings | 111,900 | 73,200 | 25,500 | 10,980 | 148,620 | ||||
| Retained Earnings Statement | |||||||||
| Retained Earnings | |||||||||
| P Company - 1/1 | 213,000 | 213,000 | |||||||
| S Company - 4/1 | 189,000 | b | 189,000 | ||||||
| Net Income from Above | 111,900 | 73,200 | 25,500 | 10,980 | 148,620 | ||||
| Dividends Declared | |||||||||
| P Company | - | ||||||||
| S Company | (30,000) | a | 25,500 | 25,500 | (4,500) | ||||
| Retained Earnings 12/31 | 324,900 | 232,200 | 214,500 | 25,500 | 25,500 | 6,480 | 361,620 | ||
| Balance Sheet | |||||||||
| Cash | 18,000 | 15,000 | 33,000 | ||||||
| Accounts Receivables | 78,300 | 81,000 | 159,300 | ||||||
| Dividends Receivable | 25,500 | d | 25,500 | 25,500 | |||||
| Inventory | 139,200 | 78,000 | 217,200 | ||||||
| Investment in S | 357,000 | b | 357,000 | 357,000 | |||||
| Difference between Implied and Book Value | b | 85,800 | c | 85,800 | 85,800 | ||||
| Goodwill | b | 45,800 | 45,800 | ||||||
| Plant and Equipment, net | 561,600 | 311,400 | c | 40,000 | 913,000 | ||||
| Total | 1,179,600 | 485,400 | 1,368,300 | ||||||
Unlock the complete assignment
You are viewing the free preview. Purchase this assignment once to reveal the complete resource.
Secure checkout is completed by Stripe.