Loose Leaf for Fundamentals of Advanced Accounting
Loose Leaf for Fundamentals of Advanced Accounting
7th Edition
ISBN: 9781260151879
Author: Hoyle, Joe Ben; Schaefer, Thomas; Doupnik, Timothy
Publisher: McGraw-Hill Education
Question
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Chapter 6, Problem 49P
To determine

Determine consolidated financial totals for the given business combination.

Expert Solution & Answer
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Explanation of Solution

The consolidated financial totals for the given business combination is as follows:

Company P and Company S
Consolidation Worksheet
Year ending December 31, 2018
Income statement Company PCompany SDebitCreditConsolidated Balances
       
Sales ($800,000)($400,000)(TI)    90,000 ($1,110,000)
Cost of goods sold $528,000$260,000(G)      6,000(TI)   90,000$704,000
Expenses $180,000$130,000(E)    11,000(ED)   2,000$319,000
Gain on sale of equipment ($8,000)$0(TA)    8,000 $0
Net income ($100,000)($10,000) ($87,000)
       
Balance Sheet      
Cash $30,000$40,000   
Accounts receivable $300,000$100,000 (P)    28,000 
Inventory $260,000$180,000 (G)      6,000 
Investment in Company S $560,000$0 (S)  450,000 
     (A)  110,000 
Land, buildings, and equipment $680,000$500,000(TA)  10,000  
Accumulated depreciation ($180,000)($90,000)(ED)    2,000(TA)  18,000 
Intangible Asset $0$0(A)  110,000(E)    11,000 
Total assets $1,650,000$730,000 $1,879,000
       
Accounts payable ($140,000)($90,000)(P)    28,000 ($202,000)
Long-term liabilities ($240,000)($180,000)  ($420,000)
Preferred stock $0($100,000)(S)100,000 $0
Common stock ($620,000)($200,000)(S)  200,000 ($620,000)
Additional paid-in capital ($210,000)$0  ($210,000)
Retained earnings, 12/31 ($440,000)($160,000)  ($427,000)
Total liabilities and stockholders’ equity ($1,650,000)($730,000)$715,000$715,000($1,879,000)

Table: (1)

Working note:

Statement of retained earnings Company PCompany SDebitCreditConsolidated Balances
Retained earnings, 1/1 ($400,000)($150,000)(S)  150,000  
Net income ($100,000)($10,000)   
Dividends declared $60,000$0   
Retained earnings, 12/31 ($440,000)($160,000)  ($427,000)

Table: (2)

Computation of unrealized gross profit:

ParticularsAmount
Rate of gross profit ($90,000$60,000$90,000×100) 33.33%
Inventory unsold at year end$ 18,000
Unrealized gross profit $   6,000

Table: (3)

Computation of annual amortization:

ParticularsAmount
Consideration paid $ 560,000
Book value of Company S $ 450,000
Excess fair value over book value $ 110,000
Annual amortization of intangible asset (10 years) $   11,000

Table: (4)

Computation of gain on sale of equipment:

ParticularsAmount
Carrying amount of equipment $   20,000
Book value of equipment $   12,000
Gain on sale $   10,000
Depreciation ($20,000÷4) $     5,000
Accumulated depreciation $     5,000

Table: (5)

Worksheet adjustments:

Entry S
 Date Accounts Title and Explanation Post Ref. Debit Credit
  Common stock  $100,000 
  Preferred stock  $200,000 
  Retained earnings on 01/01/2018  $150,000 
  Investment in Company S   $  450,000
  (being  stock of subsidiary eliminated)   
     
 Entry A
 Date Accounts Title and Explanation Post Ref. Debit Credit
  Intangible asset  $110,000 
  Investment in Company S   $  110,000
  (being excess fair value transferred to intangible asset)   
     
 Entry E
 Date Accounts Title and Explanation Post Ref. Debit Credit
  Amortization expense  $  11,000 
  Intangible asset   $    11,000
  (being amortization on intangible asset recorded)   
     
 Entry P
 Date Accounts Title and Explanation Post Ref. Debit Credit
  Accounts Payable  $  28,000 
  Accounts Receivable   $    28,000
  (being intra-entity receivables and payables eliminated)   
     
 Entry TA
 Date Accounts Title and Explanation Post Ref. Debit Credit
  Equipment  $  10,000 
  Gain on sale of equipment  $    8,000 
  Accumulated Depreciation   $    18,000
  (Being excess depreciation and gain eliminated)   

Table: (6)

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