Chapter 3, Problem 49P

a.

To determine

Prepare the journal entry to record the acquisition of the subsidiary.

Explanation of Solution

An acquisition of assets is the purchase of a corporation by purchasing its assets rather than its stock. An acquisition is when one company acquires most or all of the shares of another company to gain control over that company. Goodwill is an intangible asset associated with one company being purchased from another.

The required journal entry to record the acquisition is as follows:

Date	Account title and Explanation	Post Ref	Debit ($)	Credit ($)
	Equity Investment		$\$2,850,000$
	Common Stock			$\$47,500$
	APIC			$\$2,802,500$
	(To record the acquisition of the subsidiary)

Table (1)

Working notes:

Number of shares exchanged by the parent companyis $47,500$.

Market value per share is $60 on the acquisition date.

Calculate fair value of the entire acquired business:

$47,500\text{ shares }\times \$\text{60/share}=\$2,850,000$

b.

To determine

Exhibit computations to yield the parent company's reported Equity Income in its income

statement during 2019.

Explanation of Solution

Equity income is money generated from stock dividends that investors can access by buying dividend-declared stocks or by buying funds that invest in dividend-declared stocks.

The computations to yield the parent company’s reported Equity Investment is as follows:

Particulars	Amount ($)
Subsidiary net income	$\$300,000$
Less: Depreciation/amortization	$85,000$
Equity Income	$\underset{\_}{\underset{\_}{\$215,000}}$

Table (1)

Working notes:

Subsidiary’s net income is $\$300,000$

Depreciation/Amortization is $\$85,000(\$20,000+\$30,000+\$35,000)$

Hence, the equity income reported by the parent is $\$215,000$

c.

To determine

Exhibit computations to yield the parent company's reported Equity Investment balance

on Dec 31, 2019..

Explanation of Solution

An investment in equity is money which is invested in a company by buying that company's shares in the stock market. Typically, those shares are traded in a stock exchange.

The computations to yield the parent company’s reported Equity Investment is as follows:

Particulars	Amount ($)
Beginning Equity Investment	$\$2,850,000$
Equity Income	$215,000$
Less: Dividends	$45,000$
Ending Equity Investment	$\underset{\_}{\underset{\_}{\$3,020,000}}$

Table (1)

Working notes:

Number of shares exchanged by the parent companyis $47,500$.

Market value per share is $60 on the acquisition date.

Calculate fair value of the entire acquired business:

$47,500\text{ shares }\times \$\text{60/share}=\$2,850,000$

Equity income of parent company is $\$215,000$

APIC of subsidiary is $\$355,000$.

Dividendof the subsidiary is $\$45,000$

Hence, the ending equity investmentreported by the parent is $\$3,020,000$

d.

To determine

Demonstrate the calculation to determine the amount assigned on January 1, 2019 for the Goodwill asset.

Explanation of Solution

An acquisition of assets is the purchase of a corporation by purchasing its assets rather than its stock. An acquisition is when one company acquires most or all of the shares of another company to gain control over that company.

Goodwill is an intangible asset associated with one company being purchased from another. In particular, goodwill is the portion of the purchase price which is higher than the sum of the net fair value of all the assets purchased during the acquisition and the liabilities assumed during the acquisition process. If the acquired assets are not a business, then as an asset acquisition, the reporting entity shall account for the transaction or other event.

The amount of recognized goodwill is equal to the total fair value of the whole business acquired less the fair value of tangible and intangible net assets. Therefore, the amount of goodwill that will record in the acquisition is $\$176,000$.

Working notes:

Number of shares exchanged by the parent companyis $47,500$.

Market value per share is $60 on the acquisition date.

Calculate fair value of the entire acquired business:

$47,500\text{ shares }\times \$\text{60/share}=\$2,850,000$

BOY retained earnings of subsidiary is $\$1,245,000$.

Common stock of subsidiary is $\$200,000$.

APIC of subsidiary is $\$355,000$.

Calculate BOY book value of subsidiary net assets:

$\begin{array}{c}\text{BOY book value of subsidiary}=\text{BOY retained earnings}+\text{Common stock}+\text{APIC}\\ =\$1,245,000+\$200,000+\$355,000\\ =\$1,800,000\end{array}$

PPE asset undervalued by $\$320,000$.

License asset undervalued by $\$210,000$.

Customer List asset undervalued by $\$280,000$.

Calculate fair value of the net assets acquired:

Particulars	Amount ($)
BOY book value of subsidiary net assets	$\$1,800,000$
Add: PPE asset	$\$320,000$
Add: License asset	$\$210,000$
Add: Customer List asset	$\$280,000$
Fair value of assets acquired	$\underset{\_}{\underset{\_}{\$2,610,000}}$

Total value of the consideration given is $\$2,850,000$.

Calculate goodwill:

$\begin{array}{c}\text{Goodwill}=\text{Total value of consideration}-\text{FVINA}\\ =\$2,850,000-\$2,610,000\\ =\$240,000\end{array}$

e.

To determine

Mention the amount at which each of the following will report on the consolidated financial statement for the year ended Dec 31, 2019.

• Consolidated net income
• Accounts receivable
• Equity investment
• Property, plant and equipment (PPE), net
• Goodwill
• Common stock
• APIC
• Retained Earnings

Explanation of Solution

Consolidated financial statements are a group of entities financial statements that are presented as those of a single economic entity. They are the financial statements of a group in which the parent company and its subsidiaries introduce their assets, liabilities, equity, revenue, expenses and cash flows as those of a single business organization.

A consolidated balance sheet provides a parent company's assets and liabilities and all of its subsidiaries in a legal document, without any differentiation on which items pertain to which companies.

Consolidation worksheet is an instrument used to prepare a parent's consolidated financial statements and their subsidiaries. It demonstrates the individual book values of companies, the adjustments and eliminations necessary, and the consolidated final values.

The consolidated spreadsheet for the year ended December 31, 2019 is shown below:

						Elimination entries
Income Statement		Parent		Subsidiary		Dr		Cr		Consolidated
Sales		7,000,000		2,000,000						9,000,000
Cost of goods sold		(4,515,000)		(1,200,000)						(5,715,000)
Gross Profit		2,485,000		800,000						3,285,000
Investment Income		215,000			[C]	215,000				0
Operating Expenses		(1,500,000)		(500,000)	[D]	85,000				(2,085,000)
Net Income		1,200,000		300,000						1,200,000
Statement of Retained Earnings
Beginning Retained Earnings		3,600,000		1,245,000	[E]	1,245,000				3,600,000
Net Income		1,200,000		300,000						1,200,000
Dividends		(200,000)		(45,000)			[C]	45,000		(200,000)
Ending retained Earnings		4,600,000		1,500,000						4,600,000
Balance Sheet
Assets
Cash		$580,000		$520,000						$1,100,000
Accounts receivable		900,000		450,000						1,350,000
Inventory		1,400,000		530,000						1,930,000
Equity investment		3,020,000					[C]	170,000		0
							[E]	1,800,000
							[A ]	1,050,000
PPE, net		5,000,000		1,500,000	[A]	320,000	[D]	20,000		6,800,000
License Agreement					[A]	210,000	[D]	30,000		180,000
Customer List					[A]	280,000	[D]	35,000		245,000
Goodwill					[A]	240,000				240,000
		$10,900,000		$3,000,000						$11,845,000
Liabilities and Stockholder'sEquity
Accounts payable		500,000		$165,000						665,000
Accrued liabilities		700,000		220,000						920,000
Long-term Liabilities		1,200,000		560,000						1,760,000
Common stock		800,000		200,000	[E]	200,000				800,000
APIC		3,100,000		355,000	[E]	355,000				3,100,000
Retained earnings		4,600,000		1,500,000						4,600,000
		$10,900,000		$3,000,000		3,150,000		3,150,000		$11,845,000

Hence, the above consolidated financial statements reports the amount of 1,200,000 for consolidated net income, $1,350,000 for accounts receivable; 0 for equity investment; $6,800,000 for PPE, net; 240,000 for Goodwill; 800,000 for Common Stock; 3,100,000 for APIC; and 4,600,000 for Retained Earnings.

f.

To determine

Classify the name of the intangible assets that will be reported on the consolidated balance sheet with their amount and also givethe reason why they were not reportedprior in pre-acquisition financial statements of the parent or the subsidiary

Explanation of Solution

Consolidated financial statements are a group of entities financial statements that are presented as those of a single economic entity. They are the financial statements of a group in which the parent company and its subsidiaries introduce their assets, liabilities, equity, revenue, expenses and cash flows as those of a single business organization.

A consolidated balance sheet provides a parent company's assets and liabilities and all of its subsidiaries in a legal document, without any differentiation on which items pertain to which companies.

Unlike physical assets, such as machinery and buildings, and financial assets such as government securities, an intangible asset is an asset that appears to lack physical appearance. An intangible asset is normally very difficult to assess. Patents, copyrights, franchises, goodwill, trademarks and trade names are examples. Also includes software and other intangible computer-based assets in the general interpretation; these are all examples of intangible assets.

In the consolidation process we recognized the intangible assets which reported on the year end consolidated financial statement: the License Agreement of $180,000 with one year of amortization; the Customer List of $245,000 with one year of amortization, and Goodwill amount to $240,000. These assets were previously embedded on the balance sheet of the Parent in the Equity investment account. These are explicitly recognized in the consolidation process and now reported on the consolidated balance sheet.