accounting-Herbert, Inc., acquired all of Rambis Company’s outstanding stock

QUESTION

(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 the date 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 2013 and 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 the
subsidiary.
•
If the parent uses the equity method, what is the amount reported as
consolidated retained earnings on December 31, 2013?
•
Would the amount of consolidated retained earnings change if the parent had
applied either 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
balance on 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 *Con 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 of Leahy, Inc., for $6.30 per share on January 1, 2012. The remaining 20
percent of Leahy’s shares also traded actively at $6.30 per share before and
after Krause’s acquisition. An appraisal made on that date determined that all
book values appropriately reflected the fair values of Leahy’s underlying accounts
except that a building with a 5-year life was undervalued by $45,000 and a
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 earnings
balance 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 percent of Sawyer’s outstanding shares continue to trade at a collective
value of $174,000. On the acquisition 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 a five-year life but is not recorded on its financial
records. At the end of the year, the two companies report 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
consolidated income statement for this year?
b.
Assume
that the acquisition took place on April 1. Sawyer’s revenues and expenses occurred
uniformly throughout the year. What amounts would appear in a consolidated income
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 was assigned 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 before adjustments
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 the end 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 the year
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 to the
controlling and non-controlling interest?
c.If the
intra-entity sales were downstream, how would consolidated net income be
allocated to 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 2013 consolidated
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 but had a $60,000 book
value on that date) to Placid Lake for $80,000. At the time of sale, the equipment
had a remaining useful life of five years. What worksheet entries are made for a
December 31, 2013, consolidation of these two companies to eliminate the impact
of the intra-entity transfer? For 2013, what is the non-controlling interest’s
share of Scenic’s net income?

ANSWER:

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