Assessment 2: Consolidations

Assessment 2: Consolidations

Prather, Inc., buys 80 percent of the outstanding common stock of Sun Corporation on January 1, 2018, for $1,496,000 cash. At the acquisition date, Sun’s total fair value, including the noncontrolling interest, was assessed at $1,870,000 although Sun’s book value was only $1,320,000. Also, several individual items on Sun’s financial records had fair values that differed from their book values as follows. Note: Credits are indicated by parentheses.

	Book Value	Fair Value
Land	$132,000	$495,000
Buildings and equipment (10-year remaining life)	605,000	550,000
Copyright (20-year life)	220,000	440,000
Notes payable (due in 8 years)	(286,000)	(264,000)

For internal reporting purposes, Prather, Inc., employs the equity method to account for this investment. The following account balances are for the year ending December 31, 2018, for both companies. Using the acquisition method, determine consolidated balances for this business combination (through either individual computations or the use of a worksheet).

	Prather	Sun
Revenues	$(2,992,000)	$(1,188,000)
Cost of goods sold	1,540,000	847,000
Depreciation expense	572,000	22,000
Amortization expense	–0–	11,000
Interest expense	96,800	11,000
Equity in income of Sam	(231,000)	–0–
Net income	$(1,014,200)	$(297,000)
Retained earnings, 1/1/18.	$(2,783,000)	$(968,000)
Net income (above)	(1,014,200)	(297,000)
Dividends paid	572,000	143,000
Retained earnings, 12/31/18	$(3,225,200)	$(1,122,000)
Current assets	$ 2,123,000	$1,161,600
Investment in Sam	1,612,600	–0–
Land	642,400	132,000
Buildings and equipment (net)	1,929,400	583,000
Copyright	–0–	209,000
Total assets	$6,307,400	$2,085,600
Accounts payable	$(420,200)	$(325,600)
Notes payable	(1,012,000)	(286,000)
Common stock	(660,000)	(220,000)
Additional paid-in capital	(990,000)	(132,000)
Retained earnings (above)	(3,225,200)	(1,122,000)
Total liabilities and equities	$(6,307,400)	$(2,085,600)

Panther Corporation acquired 80 percent of the outstanding voting stock of Staffer Company on January 1, 2018, for $924,000 in cash and other consideration. At the acquisition date, Panther assessed Staffer’s identifiable assets and liabilities at a collective net fair value of $1,155,000 and the fair value of the 20 percent noncontrolling interest was $231,000. No excess fair value over book value amortization accompanied the acquisition.

The following selected account balances are from the individual financial records of these

two companies as of December 31, 2019:

	Panther	Staffer
Sales .	$1,408,000	$792,000
Cost of goods sold	638,000	433,400
Operating expenses	330,000	231,000
Retained earnings, 1/1/19	1,628,000	396,000
Inventory	761,200	242,000
Buildings (net)	787,600	345,400
Investment income	Not given	–0–

Each of the following problems is an independent situation:

a. Assume that Panther sells Staffer inventory at a markup equal to 40 percent of cost. Intra-entity transfers were $198,000 in 2018 and $242,000 in 2019. Of this inventory, Staffer retained and then sold $61,600 of the 2018 transfers in 2019 and held $84,000 of the 2019 transfers until 2020. On consolidated financial statements for 2019, determine the balances that would appear for the following accounts:

· Cost of Goods Sold

· Inventory

· Noncontrolling Interest in Subsidiary’s Net Income

b. Assume that Staffer sells inventory to Panther at a markup equal to 40 percent of cost. Intra-entity transfers were $110,000 in 2018 and $176,000 in 2019. Of this inventory, $46,200 of the 2018 transfers were retained and then sold by Panther in 2019, whereas $77,000 of the 2019 transfers were held until 2020. On consolidated financial statements for 2019, determine the balances that would appear for the following accounts:

· Cost of Goods Sold

· Inventory

· Noncontrolling Interest in Subsidiary’s Net Income

c. Panther sells Staffer a building on January 1, 2018, for $176,000, although its book value was only $110,000 on this date. The building had a five-year remaining life and was to be depreciated using the straight-line method with no salvage value. Determine the balances that would appear on consolidated financial statements for 2019 for the following accounts:

· Buildings (net)

· Operating Expenses

· Noncontrolling Interest in Subsidiary’s Net Income

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