Chapter 3, Problem 53P

a.

To determine

Calculate equity investment balance as of January 1, 2019.

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. 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 balance of the Equity Investment account at the beginning of the year equals the subsidiary's Stockholders' Equity plus the [A] assets' undepreciated and unamortized balances. Since the [A] assets with a useful life have now been depreciated or amortized for 3 years, the Equity Investment account's starting balance is as follows:

BOY retained earnings of subsidiary is $\$628,000$.

Common stock of subsidiary is $\$150,000$.

APIC of subsidiary is $\$510,000$.

Calculate BOY stockholders equity of subsidiary:

$\begin{array}{c}\text{BOY stockholders equity of subsidiary}=\text{BOY retained earnings}+\text{Common stock}+\text{APIC}\\ =\$628,000+\$150,000+\$510,000\\ =\$1,288,000\end{array}$

Particulars	Amount ($)
BOY Stockholders Equity	$\$1,288,000$
PPE, net $(\$120,000-3\times \$15,000)$	$\$75,000$
Customer List $(\$320,000-3\times \$40,000)$	$\$200,000$
Royalty Agreement $(\$240,000-3\times \$20,000)$	$\$180,000$
Database $(\$300,000-3\times \$60,000)$	$\$120,000$
Goodwill	$\$500,000$
Equity investment balance	$\$2,363,000$

Table (1)

Hence, the equity investment balance as of January 1, 2019 is $\$2,363,000$.

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	$\$315,000$
Less: Depreciation/amortization	$135,000$
Equity Income	$\underset{\_}{\underset{\_}{\$180,000}}$

Table (1)

Working notes:

Subsidiary’s net income is $\$315,000$

Depreciation/Amortization is $\$135,000(\$15,000+\$40,000+\$20,000+\$60,000)$

Hence, the equity income reported by the parent is $\$180,000$

c.

To determine

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

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	$\$2,363,000$
Equity Income	$180,000$
Less: Dividends	$43,000$
Ending Equity Investment	$\underset{\_}{\underset{\_}{\$2,500,000}}$

Table (1)

BOY retained earnings of subsidiary is $\$628,000$.

Common stock of subsidiary is $\$150,000$.

APIC of subsidiary is $\$510,000$.

Calculate BOY stockholders equity of subsidiary:

$\begin{array}{c}\text{BOY stockholders equity of subsidiary}=\text{BOY retained earnings}+\text{Common stock}+\text{APIC}\\ =\$628,000+\$150,000+\$510,000\\ =\$1,288,000\end{array}$

Particulars	Amount ($)
BOY Stockholders Equity	$\$1,288,000$
PPE, net $(\$120,000-3\times \$15,000)$	$\$75,000$
Customer List $(\$320,000-3\times \$40,000)$	$\$200,000$
Royalty Agreement $(\$240,000-3\times \$20,000)$	$\$180,000$
Database $(\$300,000-3\times \$60,000)$	$\$120,000$
Goodwill	$\$500,000$
Equity investment balance	$\$2,363,000$

Table (1)

Equity income of parent company is $\$180,000$

Dividend of the subsidiary is $\$63,000$

Hence, the ending equity investment reported by the parent is $\$2,500,000$

d.

To determine

Prepare the consolidation entries for the year ended Dec 31, 2019.

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.

Consolidated accounting is used to club a parent company's financial information and one or more subsidiaries. The parent prepares consolidated financial statements through adjustment of entries and elimination of transactions between companies.

The required consolidation journal entries are as follows:

Date	Account title and Explanation	Post Ref	Debit ($)	Credit ($)
	[C] Equity Income (P)		$\$180,000$
	Dividends (S)			$\$43,000$
	Equity Investment (P)			$\$137,000$
	(To eliminate all changes in the Equity Investment account, leaving only beginning balance in the account)
	[E]  Common Stock (S) @ BOY		$\$150,000$
	APIC (S) @BOY		$\$510,000$
	Retained Earnings (S) @BOY		$\$628,000$
	Equity Investment (P)@BOY			$\$1,288,000$
	(To eliminate the portion of the investment account related to the book value of the subsidiary's Stockholders' Equity @ BOY)
	[A]  PPE, net (S) @ BOY		$\$75,000$
	Customer List (S) @ BOY		$\$200,000$
	Royalty Agreement (S) @ BOY		$\$180,000$
	Database (S) @ BOY		$\$120,000$
	Goodwill (S) @ BOY		$\$500,000$
	Equity Investment (P) @ BOY			$\$1,075,000$
	(To assign the remaining Equity Investment account (i.e., unamortizedBOY AAP) to appropriate asset & liability accounts)
	[D]  EOY Operating expenses (S)		$\$135,000$
	PPE, net			$\$15,000$
	Customer List			$\$40,000$
	Royalty Agreement			$\$20,000$
	Database			$\$60,000$
	(To record depreciation and amortization expense for the [A] assets)
	[I] No intercompany transactions

Table (1)

e.

To determine

Prepare the consolidation spreadsheet for the year ended December 31, 2019.

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, 2019x is shown below:

						Elimination entries
Income Statement		Parent		Subsidiary		Dr		Cr		Consolidated
Sales		4,200,000		2,405,000						6,605,000
Cost of goods sold		(3,000,000)		(1,190,000)						(4,190,000)
Gross Profit		1,200,000		1,215,000						2,415,000
Investment Income		180,000			[C]	180,000				0
Operating Expenses		(780,000)		(900,000)	[D]	135,000				(1,815,000)
Net Income		600,000		315,000						600,000
Statement of Retained Earnings
Beginning Retained Earnings		1,800,000		628,000	[E]	628,000				1,800,000
Net Income		600,000		315,000						600,000
Dividends		(150,000)		(43,000)			[C]	43,000		(150,000)
Ending retained Earnings		2,250,000		900,000						2,250,000
Balance Sheet
Assets
Cash		$320,000		$510,000						$830,000
Accounts receivable		620,000		460,000						1,080,000
Inventory		760,000		594,000						1,354,000
Equity investment		2,500,000					[C]	137,000		0
							[E]	1,288,000
							[A]	1,075,000
PPE, net		3,200,000		1,096,000	[A]	75,000	[D]	15,000		4,356,000
Customer List					[A]	200,000	[D]	40,000		160,000
Royalty Agreement					[A]	180,000	[D]	20,000		160,000
Database						120,000		60,000		60,000
Goodwill					[A]	500,000				500,000
		$7,400,000		$2,660,000						$8,500,000
Liabilities and Stockholder's Equity
Accounts payable		610,000		$190,000						800,000
Accrued liabilities		700,000		246,000						946,000
Long-term Liabilities		1,00,000		664,000						1,664,000
Common stock		940,000		150,000	[E]	150,000				940,000
APIC		1,900,000		510,000	[E]	510,000				1,900,000
Retained earnings		2,250,000		900,000						2,250,000
		$7,400,000		$2,660,000		2,678,000		2,678,000		$8,500,000

f.

To determine

Perform the test for potential Goodwill impairment and prepare any journal entries necessary as a consequence of that test.

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. 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.

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. Goodwill impairment is an accounting charge recorded by companies when the carrying value of the goodwill on the financial statements exceeds its fair value. Goodwill is recorded in accounting after a company retains assets and liabilities, and needs to pay a price that exceeds its identifiable net value. Goodwill impairment testing must be performed annually and every year on about the same date. Companies can either choose to run the quantitative impairment test specifically, or take advantage of the opportunity to undertake a qualitative impairment test. If a company chooses to perform a qualitative impairment test, then the company must perform a quantitative impairment test if the appropriate events and circumstances signify that it is more probable than not that a reporting unit's fair value is lower than its carrying amount

Because the fair value of the subsidiary ($2.3 million) is less than the book value of the equity investment account ($2.5 million), Goodwill is therefore potentially impaired and you should continue to the second part of the impairment test. Goodwill impairment is an accounting charge recorded by companies when the carrying value of the goodwill on the financial statements exceeds its fair value. The impairment amount is the difference between these two amounts (i.e., $200,000), provided the difference is not greater than the balance of Goodwill (i.e., $500,000). The fair value of the identifiable net assets provided in the problem (other than Goodwill) is meaningless.

Hence, the goodwill asset is found to be impaired.

Goodwill is an intangible asset associated with one company being purchased from another. Goodwill impairment is an accounting charge recorded by companies when the carrying value of the goodwill on the financial statements exceeds its fair value.

Goodwill with the following journal entry has to be written down to its implied value of $200,000:

Date	Accounting Explanation	Amount ($)	Amount ($)
	Equity income from S	$\$200,000$
	Equity investment		$\$200,000$
	(to write down the book value of goodwill)

Table (1)

Goodwill will now be reported at $300,000 on the consolidated balance sheet, and a loss on goodwill write- down will be reported in the consolidated income statement. Thereafter, the goodwill asset cannot be written up if the fair value of the subsidiary improves.

g.

To determine

Prepare the consolidated balance sheet and the consolidated income statement and consolidated statement of retained earnings for the year ended December 31, 2019.

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.

A consolidated income statement describes an overall view of the organization as a

whole, instead of its component parts. Any money owed between the companies included

in the statement will not be regarded.

The retained earnings statement (retained earnings statement) is a financial report explaining the adjustments in a company's retained earnings over a specified period.

Consolidated Income  Statement				Consolidated Balance Sheet
				Assets
Sales		$6,605,000		Cash		$830,000
Cost of goods sold		(4,190,000)		Accounts Receivable		1,080,000
Gross Profit		2,415,000		Inventory		1,354,000
Less: Operating Expenses		(1,815,000)		PPE, net		4,356,000
Loss on Impairment of Goodwill		200,000		Customer List		160,000
Net Income		$400,000		Royalty Agreement		160,000
				Database		60,000
				Goodwill		300,000
						$8,300,000
Consolidated Statement of Retained Earnings
				Liabilities
BOY retained Earnings		$1,800,000		Accounts Payable		$800,000
Net Income		400,000		Accrued Liabilities		946,000
Less: Dividends		(150,000)		Long-term Liabilities		1,664,000
Ending Retained Earnings		$2,050,000		Common Stock		940,000
				APIC		1,900,000
				Retained Earnings		2,050,000
						$8,300,000