Problem:
On January 1, 2006, John Doe Enterprises (JDE) bought a 55% interest in Bubba Manufacturing, Inc. (BMI). JDE paid for the transaction with $3.5 million cash and 400,000 shares of JDE common stock (par value $1.00 per share). At the time of the acquisition, BMI's book value was $16,970,000.
On January 1, JDE stock had a market value of $17.25 per share. Any cost over book value is assigned to goodwill, which is not amortized. BMI had the following balances on January 1, 2006.
For internal reporting purposes, JDE employed the equity method to account for this investment.
|
BOOK |
MARKET |
|
VALUE |
VALUE |
| Land |
1,700,000 |
2,550,000 |
| Buildings (seven-year remaining life) |
2,700,000 |
3,400,000 |
| Equipment (five-year remaining life) |
3,700,000 |
3,300,000 |
The following account balances are for the year ending December 31, 2006 for both companies.
|
John Doe |
Bubba |
|
Enterprises |
Manufacturing |
| Revenues |
(298,000,000) |
(103,750,000) |
| Expenses |
271,000,000 |
95,800,000 |
| Equity in income of Bubba Manufacturing |
(4,361,500) |
- |
| Non controlling interest in income |
|
|
| Net income |
(31,361,500) |
(7,950,000) |
|
|
|
| Retained earnings, January 1, 2006 |
(2,450,000) |
(100,000) |
| Net income (above) |
(31,361,500) |
(7,950,000) |
| Dividends paid |
5,000,000 |
3,000,000 |
| Retained earnings, December 31, 2006 |
(28,811,500) |
(5,050,000) |
|
|
|
| Current Assets |
30,500,000 |
20,800,000 |
| Investment in Bubba Manufacturing |
13,111,500 |
|
|
|
|
|
|
|
| Land |
1,500,000 |
1,700,000 |
| Buildings |
5,600,000 |
2,360,000 |
| Equipment (net) |
3,100,000 |
2,960,000 |
| Goodwill |
|
|
| Total assets |
53,811,500 |
27,820,000 |
|
|
|
| Accounts payable |
(3,100,000) |
(4,900,000) |
| Notes payable |
|
(1,000,000) |
| Non controlling interest |
|
|
| Common stock |
(2,900,000) |
(6,000,000) |
| Additional paid-in capital |
(19,000,000) |
(10,870,000) |
| Retained earnings, Dec. 31, 2006 (above) |
(28,811,500) |
(5,050,000) |
| Total liabilities and stockholders' equity |
(53,811,500) |
(27,820,000) |
| ELIMINATIONS |
CONSOLIDATED |
| RE |
DEBITS |
RE |
CREDITS |
NC INTEREST |
TOTALS |
REQUIRED:
A. Prepare a schedule to determine the amortization and allocation amounts.
B. Prepare a consolidation worksheet for this business combination. Assume goodwill has been reviewed and there is no goodwill impairment. Show the eliminations on the worksheet above. Insert any additional accounts on the worksheet that are needed.
C. As of the acquisition date what value would be assigned to the land, buildings, equipment, goodwill and non-controlling interest under the Economic and Proportionate Consolidation Concepts?