(1). Herbert, Inc., acquired all of Rambis Company's outstanding stock on January 1, 2012, for$574,000 in cash. Annual excess amortization of $12,000 results from this transaction. On thedate of the takeover, Herbert reported retained earnings of $400,000, and Rambis reported a$200,000 balance. Herbert reported internal income of $40,000 in 2012 and $50,000 in 2013and paid $10,000 in dividends each year. Rambis reported net income of $20,000 in 2012 and$30,000 in 2013 and paid $5,000 in dividends each year.
a. Assume that Herbert's internal income figures above do not include any income from thesubsidiary.
- If the parent uses the equity method, what is the amount reported as consolidated retainedearnings on December 31, 2013?
- Would the amount of consolidated retained earnings change if the parent had appliedeither the initial value or partial equity method for internal accounting purposes?
b. Under each of the following situations, what is the Investment in Rambis account balanceon Herbert's books on January 1, 2013?
- The parent uses the equity method.
- The parent uses the partial equity method.
- The parent uses the initial value method.
c. Under each of the following situations, what is Entry *C on a 2013 consolidation worksheet?
- The parent uses the equity method.
- The parent uses the partial equity method.
- The parent uses the initial value method.
(2) The Krause Corporation acquired 80 percent of the 100,000 outstanding voting shares ofLeahy, Inc., for $6.30 per share on January 1, 2012. The remaining 20 percent of Leahy's sharesalso traded actively at $6.30 per share before and after Krause's acquisition. An appraisal madeon that date determined that all book values appropriately reflected the fair values of Leahy'sunderlying accounts except that a building with a 5-year life was undervalued by $45,000 anda fully amortized trademark with an estimated 10-year remaining life had a $60,000 fair value
At the acquisition date, Leahy reported common stock of $100,000 and retained earningsbalance of $280,000.
Following are the separate financial statements for the year ending December 31, 2013:
Krause
Corporation Leahy, Inc.
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. $ (584,000) $(250,000)
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . 194,000 95,000
Operating expenses . . . . . . . . . . . . . . . . . . . . . 246,000 65,000
Dividend income . . . . . . . . . . . . . . . . . . . . . . (16,000) -0-
Net income . . . . . . . . . . . . . . . . . . . . . .. . . . $ (160,000) $ (90,000)
Retained earnings, 1/1/13 . . . . . . . . . . . .. . . $ (700,000) $(350,000)
Net income (above) . . . . . . . . . . . . . . . . . .. . . (160,000) (90,000)
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . 70,000 20,000
Retained earnings, 12/31/13 . . . . . . . . . . . . . $ (790,000) $(420,000)
Current assets . . . . . . . . . . . . . . . . . . . . . . . . $ 296,000 $ 191,000
Investment in Leahy, Inc. . . . . . . . . . . . . . . . . 504,000 -0-
Buildings and equipment (net) . . . . . . . . . . .. . 680,000 390,000
Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 144,000
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,580,000 $ 725,000
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . $ (470,000) $(205,000)
Common stock . . . . . . . . . . . . . . . . . . . . . . . (320,000) (100,000)
Retained earnings, 12/31/13 (above) . . . . .. . (790,000) (420,000)
Total liabilities and equities . . . . . . . . . . . $(1,580,000) $(725,000)
a. Prepare a worksheet to consolidate these two companies as of December 31, 2013.
b. Prepare a 2013 consolidated income statement for Krause and Leahy.
c. If instead the non-controlling interest shares of Leahy had traded for $4.85 surrounding
Krause's acquisition date, how would the consolidated statements change?
(3) Parker, Inc., acquires 70 percent of Sawyer Company for $420,000. The remaining 30 percentof Sawyer's outstanding shares continue to trade at a collective value of $174,000. On theacquisition date, Sawyer has the following accounts:
Book Value Fair Value
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . $ 210,000 $ 210,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170,000 180,000
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000 330,000
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (280,000) (280,000)
The buildings have a 10-year life. In addition, Sawyer holds a patent worth $140,000 that has afive-year life but is not recorded on its financial records. At the end of the year, the two companiesreport the following balances:
Parker Sawyer
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . .. $(900,000) $(600,000)
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 400,000
a. Assume that the acquisition took place on January 1. What figures would appear in a consolidatedincome statement for this year?
b. Assume that the acquisition took place on April 1. Sawyer's revenues and expensesoccurred uniformly throughout the year. What amounts would appear in a consolidatedincome statement for this year?
(4) Placid Lake Corporation acquired 80 percent of the outstanding voting stock of Scenic, Inc.,on January 1, 2012, when Scenic had a net book value of $400,000. Any excess fair value wasassigned to intangible assets and amortized at a rate of $5,000 per year.
Placid Lake's 2013 net income before consideration of its relationship with Scenic (and beforeadjustments for intra-entity sales) was $300,000. Scenic reported net income of $110,000.
Placid Lake distributed $100,000 in dividends during this period; Scenic paid $40,000. At theend of 2013, selected figures from the two companies' balance sheets were as follows:
Placid Lake Scenic
Inventory . . . . . . . . . . . . . . . . . . . . . . . .. . . . . $140,000 $ 90,000
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 200,000
Equipment (net) . . . . . . . . . . . . . . . . . . . . . . . . 400,000 300,000
During 2012, intra-entity sales of $90,000 (original cost of $54,000) were made. Only
20 percent of this inventory was still held within the consolidated entity at the end of 2012. In
2013, $120,000 in intra-entity sales were made with an original cost of $66,000. Of this merchandise,30 percent had not been resold to outside parties by the end of the year.
Each of the following questions should be considered as an independent situation for theyear 2013.
a. What is consolidated net income for Placid Lake and its subsidiary?
b. If the intra-entity sales were upstream, how would consolidated net income be allocated tothe controlling and non-controlling interest?
c. If the intra-entity sales were downstream, how would consolidated net income be allocatedto the controlling and non-controlling interest?
d. What is the consolidated balance in the ending Inventory account?
e. Assume that no intra-entity inventory sales occurred between Placid Lake and Scenic. Instead,in 2012, Scenic sold land costing $30,000 to Placid Lake for $50,000. On the 2013consolidated balance sheet, what value should be reported for land?
f. Assume that no intra-entity inventory or land sales occurred between Placid Lake and Scenic.
Instead, on January 1, 2012, Scenic sold equipment (that originally cost $100,000 buthad a $60,000 book value on that date) to Placid Lake for $80,000. At the time of sale, theequipment had a remaining useful life of five years. What worksheet entries are made fora December 31, 2013, consolidation of these two companies to eliminate the impact of theintra-entity transfer? For 2013, what is the non-controlling interest's share of Scenic's netincome?