CHAPTER 1 - California State University, Bakersfieldlbacon/chap2.doc · Web viewHowever, the business combination must periodically produce consolidated financial statements encompassing

Updated Sixth Edition

CHAPTER 2CONSOLIDATION OF FINANCIAL INFORMATION

Answers to Questions

1. A business combination is the process of forming a single economic entity by the uniting of two or more organizations under common ownership. The term also refers to the entity that results from this process.

2. (1) A statutory merger is created whenever two or more companies come together to form a business combination and only one remains in existence as an identifiable entity. This arrangement is often instituted by the acquisition of substantially all of an enterprise’s assets. (2) a statutory merger can also be produced by the acquisition of a company’s capital stock. This transaction is labeled a statutory merger if the acquired company transfers its assets and liabilities to the buyer and then legally dissolves as a corporation. (3) A statutory consolidation results when two or more companies transfer all of their assets or capital stock to a newly formed corporation. The original companies are being “consolidated” into the new entity. (4) A business combination is also formed whenever one company gains control over another through the acquisition of outstanding voting stock. Both companies retain their separate legal identities although the common ownership indicated that only a single economic entity exists.

3. Consolidated financial statements represent accounting information gathered form two or more separate companies. This data, although accumulated individually by the organizations, is brought together (or consolidated) to describe the single economic entity created by the business combination.

4. Companies that form a business combination will often retain their separate legal identities as well as their individual accounting systems. In such cases, internal financial data continues to be accumulated by each organization. Separate financial reports may be required for outside shareholders (a noncontrolling interest), the government, debt holders, etc. This information may also be utilized in corporate evaluations and other decision making. However, the business combination must periodically produce consolidated financial statements encompassing all of the companies within the single economic entity. A worksheet is used to organize and structure this process. The worksheet allows for a simulated consolidation to be carried out on a regular, periodic basis without affecting the financial records of the various component companies.

5. Three characteristics are normally indicative of a purchase:(1) One of the companies can clearly be identified as the acquiring party;(2) A bargained exchange transaction has taken place to form the business

combination;(3) A purchase price can be determined as the cost incurred by the acquiring company

to gain control over the acquired company.Conversely, a pooling of interests is viewed as the uniting of ownership interests through the exchange of equity securities. In such transactions, (1) the distinction between acquirer and acquiring company is not always clear and (2) the price of the transaction may not be easy to determine. More precise characteristics of a pooling of interests can be seen in the 12 criteria established by the Accounting Principles Board.

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These requirements hold, in part, that substantially all of one company must be obtained (at least 90 percent) in a transaction that is carried to conclusion within one year. In addition, assets cannot be sold off unless duplication results from the combination.

6. APB Opinion Number 16 specifies several situations in which the fair market value of the 50,000 shares being issued might be difficult to ascertain. These examples include: The shares may be newly issued (if Jones has just been created) so that no

accurate value has as of yet been established; Jones may be a closely held corporation so that no market value is available for its

shares; The number of newly issued shares (especially if the amount is large in comparison

to the quantity of previously outstanding shares) may cause the price of the stock to fluctuate widely so that no accurate market value can be determined during a reasonable period of time;

Jones’ stock may have historically experienced drastic swings in price. Thus, a quoted figure at any specific point in time may not be an adequate or representative value for long-term accounting purposes.

7. In every business combination, the assets and liabilities of the acquiring company retain their book values. The problem facing the accountant is the recorded basis to be used for the assets and liabilities of the acquired company. For a purchase, these accounts are traditionally consolidated at fair market value with any excess payment being attributed to goodwill. If the acquiring company pays an amount less than fair market value, the difference is accounted for by decreasing the values assigned to the noncurrent assets (other than long-term marketable securities). A deferred credit will also have to be recognized if the reduction is of sufficient size. In a pooling of interests, the book values of the two companies provide the basis for consolidating assets and liabilities.

8. In a purchase the revenues and expenses (both current and past) of the parent are included within reported figures. However, the revenues and expenses of the subsidiary are only consolidated from the date of the acquisition forward. The operations of the subsidiary are only applicable to the business combination if earned subsequent to its creation.For a pooling of interests, where neither company is considered to be truly in a parent or subsidiary position, the revenues and expenses are consolidated as if the two companies had always been joined.

9. Morgan’s additional purchase price may be attributed to many factors: favorable earnings projections, competitive bidding to acquire Jennings, etc. However, in accounting for a purchase combination, any amount paid by the parent company in excess of the subsidiary’s fair market value is reported as goodwill.

10. This business combination must be accounted for as a purchase because the acquisition was consummated by a cash transaction. Normally, in a purchase, all of the subsidiary’s asset and liability accounts are recorded at fair market value (see Answer 7 above). However, since Lambert paid less than the total fair market value for Catron’s net assets, a full allocation in this manner is not possible. When a bargain purchase has occurred APB Opinion 16 requires that a proportional reduction be recorded in the values reported for noncurrent assets (other than long-term investments in marketable

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securities). If the decrease is of such a magnitude that these accounts will be consolidated at zero values, any further reduction is recognized as a deferred credit.

11. When shares are issued in a purchase, they are recorded at their fair market value as if the stock had actually been sold with the money obtained being used to acquire the subsidiary. The Common Stock account is recorded at the par value of these shares with any excess amount attributed to additional paid-in capital.

12. In a purchase, all consolidation costs are included in the purchase price being paid to obtain the subsidiary. Consequently, the $98,000 is an added component of this price. An exception is made, though, for any stock issuance costs. Such costs are recorded as a reduction in additional paid-in capital (or retained earnings, if an Additional Paid-in Capital account does not exist). The $56,000 will be recorded in that manner.

13. When two companies are brought together in a pooling of interests, all income balances from previous operations are reported through combined totals. Thus, in reporting current and past time periods, all figures are shown as if the two companies had always been a single entity.In a purchase, the acquired company’s earnings that were generated during periods preceding the combination are totally omitted. For reporting purposes, only the acquiring company’s revenues and expenses are included for the periods prior to the purchase while the income figures of both companies are combined thereafter.


Answers to Purchase Method Problems

1. B

2. D

3. C

4. D

5. D

6. B

7. D

8. C Atkins records new shares at market value because combination is a purchase.Value of shares issued (51,000 x $3)........................................ $153,000Par value of shares issued (51,000 x $1).................................. 51,000Additional paid-in capital........................................................... $102,000

In a purchase, the parent makes no change in retained earnings.

9. C Because the parent paid $2 million which is larger than fair market value of the subsidiary’s net assets ($1,650,000), all accounts are recorded at fair market value with the excess being attributed to goodwill

10. C Because the purchase price was $1.5 million, less was paid than the fair market of the subsidiary’s net assets ($1,650,000). This bargain purchase of $150,000 is assigned to land and buildings based on their relative fair market values: land 40% and buildings—60%. A $60,000 reduction is assigned to the Land account and a $90,000 reduction is assigned to the Buildings account. These balances are consolidated after these reductions to their fair market values.


11. B Acquisition price (fair market value).............................. $400,000Book value of subsidiary (assets minus liabilities) (300,000)

Payment in excess of book value........................ 100,000Allocation of excess paymentIdentified with specific accounts:

—Inventory....................................................................... 30,000—Land............................................................................... 20,000—Buildings....................................................................... 25,000—Long-term liabilities..................................................... 10,000

Goodwill................................................................. 15,000

12. A In a purchase, the subsidiary’s income is only included if generated after the acquisition.

13. A All of Tucker’s accounts should be consolidated at fair market value in a purchase. In this instance, however, Allen has paid $50,000 below fair market value of $385,000. This $50,000 reduction is assigned to the three noncurrent assets based on fair market value.

Fair MarketValue Ratio Reduction

Land...................................$200,000 200,000 x 50,000 $20,000500,000

Buildings ............................225,000 225,000 x 50,000 22,500500,000

Equipment.......................... 75,000 75,000 x 50,000 7,500500,000

Total $500,000 $50,000

Consolidated Totals:Inventory—$365,000 (combine Tucker’s fair market value).Land—410,000 (combine Tucker’s fair market value less $20,000

reduction for bargain purchase).Retained earnings—$130,000 (Allen’s balance only is included as

combination is a purchase).14. D Total acquisition price of $400,000 is $15,000 in excess of Tucker’s fair

market value. Hence, that excess is recorded as Goodwill. Consolidated retained earnings is Allen’s beginning balance because the combination is a purchase.

15. (30 Minutes) (Overview of the steps in applying the purchase method when shares have been issued to create a combination. Includes a bargain purchase.)


a. Purchases are recorded at the fair market value sacrificed. In this case, 20,000 shares were issued valued at $55 per share. Thus, the purchase price is $1.1 million.

b. The book value is found by subtracting the assets from the liabilities. For Bakel, the assets are $1,380,000 and the liabilities are $400,000 for a book value of the company’s net assets of $980,000. The same total can be derived from the stockholders’ equity accounts after closing out revenues and expenses.

c. In a purchase, stock issue costs are recorded as a reduction in additional paid-in capital. Other direct costs of a combination are added to the purchase price

d. The par value of the 20,000 shares issued is recorded as an increase of $100,000 in the Common Stock account. The $50 market value in excess of par value ($55 - $5) is an increase in additional paid-in capital of $1 million ($50 x 20,000 shares).

e. Purchase price (above).............................. $1,100,000Book value (above).................................... 980,000

Price in excess of book value.............. $ 120,000Allocations to specific accounts based on

difference between fair market value and book value:

Inventory..................................................... $ 80,000Land............................................................. (200,000)Building....................................................... 100,000Liabilities..................................................... 70,000 50,000

Goodwill................................................. $ 70,000

f. In-process research and development would be recorded at $60,000 and goodwill would be reduced to $10,000. Acquired in-process research and development is typically reported as an expense in the year of the acquisition assuming (1) no alternative use for the assets involved in the research and development, and (2) no resulting products hvae reached technological feasibility.


g. In a purchase, any revenues and expenses of the subsidiary from the period before the combination was created are omitted from the consolidated totals. Only the operational figures for the subsidiary after the purchase are applicable to the business combination. The previous owners earned any previous profits.

h. The subsidiary’s Common Stock and Additional Paid-in Capital accounts have no impact on the consolidated totals.

i. The subsidiary’s asset and liability accounts will be consolidated at their fair market values with any excess payment being attributed to goodwill. The equity, revenue, and expense figures of the subsidiary do not affect the business combination at the date of acquisition. The parent must record the issuance of the 20,000 new shares and the payment of the stock issue costs.

j. If the stock was worth only $40 per share, the purchase price is now $800,000. This amount indicates a bargain purchase:

Purchase price (above).............................. $ 800,000Book value (above).................................... 980,000

Book value in excess of purchase price $ (180,000)Allocations to specific accounts based ondifference between fair market valueand book value:Inventory..................................................... $ 80,000Land ........................................................... (200,000)Building....................................................... 100,000Liabilities..................................................... 70,000 50,000

Excess fair market value over cost..... ($230,000 )

The bargain purchase figure must be allocated between the land and building based on their fair market values of $400,000 (40%) and $600,000 (60%). Therefore, all of the assets and liabilities will be consolidated at fair market value except that the land will be reported at $92,000 below market value ($230,000 x 40%) and the building will be reported at $138,000 below market value ($230,000 x 60%).


16. (10 Minutes) (Consolidated balances for a purchase.)a. This combination must be a purchase because cash was paid.

Purchase price (fair market value):—Cash.................................................... $1,400,000—Stock issued...................................... 800,000 $2,200,000

Book value of assets (no liabilities are indicated) 2,000,000Cost in excess of book value.................... $ 200,000Excess cost assigned to Buildings account

based on fair market value.................. $ 100,000Goodwill...................................................... $ 100,000

b. None of Winston’s expenses will be included in consolidated figures as of the date of acquisition. In a purchase, only subsidiary expenses incurred after that date are applicable to the business combination. As a purchase, the $30,000 stock issue costs reduce additional paid-in capital.

c. None of Winston’s beginning retained earnings balance will be included in consolidated figures as of the date of acquisition. As in Part b. (above), only the subsidiary’s operational figures recognized after the February 1, 2002 purchase relate to the business combination.

d. Buildings should be reported at $1,000,000. Unless a bargain purchase has occurred, assets acquired in a purchase are recorded at fair market value.


17. (10 Minutes) (Consolidated balances for a purchase.)

a. Purchase price: (includes combination costs)............. $2,340,000Book value of assets (no liabilities are indicated)....... 2,000,000Cost in excess of book value......................................... $ 340,000Excess cost assigned to Buildings account

based on fair market value........................................ 100,000Goodwill ........................................................................... $ 240,000

b. None of Winston’s expenses will be included in consolidated figures as of the date of acquisition. In a purchase, only subsidiary expenses incurred after that date are applicable to the business combination.

c. None of Winston’s beginning retained earnings balance will be included in consolidated figures as of the date of acquisition. As in Part b. (above), only the subsidiary’s operational figures recognized after the February 1, 2002 purchase relate to the business combination.

d. Buildings should be reported at $1,000,000. Unless a bargain purchase has occurred, assets acquired in a purchase are recorded at fair market value.


18. (20 Minutes) (Consolidated balances for a bargain purchase.)

a. Inventory (fair market value) $600,000b. A bargain purchase has occurred; thus, no goodwill is recognized.

Purchase price (includes direct combination costs) $2,040,000Book value of assets (no liabilities are indicated) 2,000,000Cost in excess of book value $ 40,000Excess cost assigned to Buildings account

based on fair market value 100,000Bargain purchase $ (60,000)Allocation of $60,000 Bargain Purchase:

Noncurrent Fair Market Percentage AllocationAssets ValueLand $500,000 33 1/3% $(20,000)Buildings 1,000,000 66 2/3% (40,000)

Totals $1,500,000 100% $(60,000)

c. None of Winston’s expenses will be included in consolidated figures as of the date of acquisition. In a purchase, only subsidiary expenses incurred after that date are reported by the business combination.

d. Buildings—fair market value..................... $1,000,000Allocation of bargain purchase

(see b. above) ..................................... (40,000)Balance to be consolidated................. $ 960,000

e. Land—fair market value............................. $ 500,000Allocation of bargain purchase

(see b. above) ..................................... (20,000)Balance to be consolidated................. $ 480,000


19. As a purchase, the stock being issued is valued at its market value of $250,000. This purchase price is also increased by the $10,000 direct combination cost leading to a total price of $260,000. The $20,000 stock issue cost is a reduction in additional paid-in capital. The Journal entries for these transactions can be made as follows:

Bingham's Journal EntriesInvestment in Laredo (fair market value)................. 250,000

Common Stock (par value).................................. 100,000Additional Paid-in Capital.................................... 150,000

Investment in Laredo (direct combination costs)... 10,000Additional Paid-in Capital (stock issue costs)........ 20,000

Cash ..................................................................... 30,000Once the purchase price has been established, an allocation should be made.Purchase price............................................................ $260,000Book value of Laredo, 12/31/02

(Assets minus liabilities)...................................... (190,000)Cost in excess of book value......................... $ 70,000

Excess cost assigned to specific accountsbased on fair market value:—Buildings............................................................ 40,000

Excess cost not attributed to specific accounts—goodwill................................................................. $ 30,000

CONSOLIDATED BALANCE-PURCHASERevenues (Bingham balance only, subsidiary not

included until after acquisition).......................... $100,000Expenses (Bingham balance only, subsidiary not

included until after acquisition).......................... (60,000)Net income (revenues minus expenses).................. 40,000Retained earnings, 1/1/02 (Bingham balance only,

subsidiary not included until after acquisition). 210,000Dividends.................................................................... (30,000)Retained earnings, 12/31/02 (beginning balance

plus net income less dividends)......................... 220,000Cash (balances for the two companies less the

$30,000 paid above).............................................. 70,000Receivables (summation).......................................... 120,000Inventory (summation)............................................... 170,000Buildings and equipment (summation plus

allocation based on fair market value)............... 340,000


19. (continued)

Investment in Laredo (always eliminated inconsolidation)....................................................... -0-

Goodwill (computed above)...................................... 30,000Total assets (summation).......................................... 730,000Current liabilities (summation)................................. 30,000Long-term liabilities (summation)............................. 120,000Common stock (Bingham's balance after

adjustment for above entry)................................. 210,000Additional paid-in capital (Bingham's balance

after adjustment for both of above entries)....... 150,000Retained earnings, 12/31/02 (computed above)...... 220,000Total liabilities and stockholders' equity

(summation).......................................................... 730,000

20. (75 Minutes) (Consolidated balances)

On the date the business combination is formed, the assets and liabilities of Sun have a net book value of $560,000 but a fair market value of $680,000.

a. Because Parrot acquires 100 percent of Sun in a business combination accounted for as a purchase, the fair market value of each of the subsidiary's assets and liabilities are consolidated. Goodwill is calculated as $80,000, the amount that the $760,000 purchase price exceeds the $680,000 fair market value of Sun.

Inventory—$670,000 (Parrot's book value plus Sun's fair market value)Land—$710,000 (Parrot's book value plus Sun's fair market value)Buildings—$930,000 (Parrot's book value plus Sun's fair market value)Goodwill—$80,000 (calculated above)Revenues—$960,000 (only parent company operational figures are

reported at date of a purchase)Additional Paid-in Capital—$70,000 (Parrot's book value)Expenses—$920,000 (only parent company operational figures are

reported at date of a purchase)Retained Earnings, 1/1/02—$390,000 (Parrot's book value)


20. (continued)b. Because Parrot acquires 100 percent of Sun in a business combination

accounted for as a purchase, the fair market value of each of the subsidiary's asset and liability accounts are consolidated. The $580,000 purchase price (cash plus value of stock issued plus $20,000 In direct combination costs) is $100,000 below the $680,000 total fair market value, thus necessitating a write-down within the consolidation process. A reduction of this type is always made against the noncurrent assets (other than financial and other specific assets). Thus, in this combination, the $100,000 is apportioned as follows based on the fair market values of the subsidiary's noncurrent asset accounts:

Land 110,000/660,000 = 1/6 x ($100,000) = ($16,667)Buildings 330,000/660,000 = 1/2 x ($100,000) = ($50,000)Equipment 220,000/660,000 = 1/3 x ($100,000) = ($33,333)

Inventory—$670,000 (Parrot's book value plus Sun's fair market value)Land—$693,333 (Parrot's book value plus Sun's fair market value butLess the $16,667 reduction calculated above)Buildings—$880,000 (Parrot's book value plus Sun's fair market value

but less the $50,000 reduction calculated above)Goodwill—-0- (Bargain purchase)Revenues—$960,000 (parent company figure)Additional Paid-in Capital—$265,000 (Parrot's book value after issuance

of 10,000 new shares at a value $20 above par but also less $5,000 in stock issuance costs)

Expenses—$920,000 (parent company figure)Retained Earnings, 1/1/02—$390,000 (parent company figure)


21. (20 Minutes) (Determine selected consolidated balances for a purchase)

As a purchase, fair market value is used to record the shares issued by Willieslye:Investment in Barrett (value of debt and shares issued)900,000

Common Stock (par value)........................................ 150,000Additional Paid-in Capital

(excess of stock value over par value)............... 450,000Liabilities..................................................................... 300,000

The payment to the broker must also be recorded and, since a purchase is being made, is accounted for as a cost of the investment. However, the stock issue cost is a reduction in additional paid-in capital.Investment in Barrett....................................................... 30,000Additional Paid-in Capital............................................... 40,000

Cash............................................................................. 70,000Allocation of Purchase Price:Purchase Price of Barrett Stock (includes combination cost) $930,000Book Value of Barrett, 12/31........................................... 770,000

Cost in Excess of Book Value................................... $160,000

Excess Cost Assigned to Undervalued Equipment..... $100,000Excess Cost Assigned to Overvalued Building............ (20,000)

Goodwill...................................................................... $ 80,000CONSOLIDATED BALANCES:Net income (as a purchase, the figures earned by the

subsidiary prior to the takeover are not included)................. $ 240,000Retained Earnings, 1/1 (as a purchase, the figures earned

by the subsidiary prior to the takeover are not included)...... 800,000Equipment (the parent's book value plus the fair market

value of the subsidiary)............................................................. 1,400,000Goodwill (computed above)............................................................ 80,000Liabilities (the parent's book value plus the fair market value

of the subsidiary's debt plus the debt issued by the parentin acquiring the subsidiary)...................................................... 1,210,000

Common Stock (the parent's book value after recordingthe newly-issued shares)........................................................... 510,000

Additional Paid-in Capital (the parent's book valueafter recording the two entries above)..................................... 680,000


22. (45 Minutes) (Prepare entries for a purchase created as a statutory merger.Also, use worksheet to derive consolidated totals.)

a. The combination of Merrill, Inc. and Harriss Co. must be a purchase because cash was used, in part, to acquire the shares of Harriss. Thus, a purchase price must be determined with any excess payment then allocated to appropriate accounts.

Cash paid............................................................... $200,000Fair market value of shares issued..................... 180,000Direct acquisition costs....................................... 10,000

Purchase price................................................ $390,000

Purchase price (above)........................................ $390,000Book value of Harriss (assets minus

liabilities).......................................................... 280,000Excess payment.................................................... $110,000Excess payment assigned to specific

accounts based on fair market value:—Receivables (overvalued)................................. (10,000)—Buildings............................................................ 30,000—Long-term liabilities.......................................... 20,000—Patent................................................................. 30,000Goodwill................................................................. $ 40,000


22. a (continued)

Journal Entries—Merrill, Inc.—January 1, 2002Investment in Harriss Co................................ 380,000

Cash....................................................... 200,000Common Stock (Merrill, Inc.) (par value) 100,000Additional Paid-in Capital.................... 80,000

(To record purchase of Harriss' shares)

Investment in Harriss Co................................ 10,000Cash....................................................... 10,000

(Direct acquisition costs incurred)

Additional Paid-in Capital............................... 6,000Cash....................................................... 6,000

(Stock issuance costs incurred)

Cash ................................................................ 40,000Receivables...................................................... 80,000Inventory.......................................................... 130,000Land ................................................................ 60,000Buildings.......................................................... 140,000Equipment........................................................ 50,000Patent................................................................ 30,000Goodwill........................................................... 40,000

Accounts Payable...................................... 30,000Long-Term Liabilities................................. 150,000Investment in Harriss Co........................... 390,000

(To remove investment account and replace it with fair market values of specific accounts transferred from Harriss.)


22. (continued) MERRILL, INC., AND HARRISS CO.b. Consolidation Worksheet

January 1, 2002 Consolidation Entries Consolidated

Accounts Merrill, Inc. Harriss Co. Debit Credit Totals DebitsCash.................................. $ 84,000 $ 40,000 $ 124,000Receivables...................... 160,000 90,000 (A) 10,000 240,000Inventory........................... 220,000 130,000 350,000Investment in Harriss....... 390,000 -0- (S) 280,000

(A) 110,000 -0-Land................................... 100,000 60,000 160,000Buildings........................... 400,000 110,000 (A) 30,000 540,000Equipment......................... 120,000 50,000 170,000Patent................................ -0- -0- (A) 30,000 30,000Goodwill............................ - 0 - - 0 - (A) 40,000 40,000Totals................................. $1,474,000 $480,000 $1,654,000 CreditsAccounts payable............ $ 160,000 $ 30,000 $ 190,000Long-term liabilities......... 380,000 170,000 (A) 20,000 530,000Common stock................. 500,000 40,000 (S) 40,000 500,000Additional paid-in capital 74,000 -0- 74,000Retained earnings............ 360,000 240,000 (S) 240,000 360,000Totals................................. $1,474,000 $480,000 $1,654,000

Note: The accounts of Merrill have already been adjusted for the first three journal entries indicated in the answer to Part a. to record the purchase price, the direct acquisition costs, and the stock issuance costs.

The consolidation entries are designed to:—Eliminate the stockholders, equity accounts of the subsidiary—Record all subsidiary assets and liabilities at fair market value (including the patent)—Recognize the goodwill indicated by the acquisition price


—Eliminate the investment in Harriss account


23. (50 Minutes) (Determine consolidated balances for a bargain purchase.Prove those figures with a worksheet)

a. Prior to setting up the consolidation worksheet, Lee has to record the three transactions that occurred in creating this business combination.

- Investment in Grant....................................... 400,000Long-Term Liabilities................................. 200,000Common Stock (par value)........................ 20,000Additional Paid-in Capital.......................... 180,000

(liabilities and stock issued to purchase Grant are recorded at fair market value)

- Investment in Grant....................................... 30,000Cash............................................................. 30,000(payment of direct acquisition costs)

- Additional Paid-in Capital............................. 12,000Cash............................................................. 12,000(payment of stock issuance costs)

These transactions must be taken into consideration in b. in setting up Lee's trial balance (as shown in the consolidation worksheet that follows).

Since this combination is a purchase, the cost of the $430,000 investment must be allocated:

Purchase price...................................................................... $430,000Book value (assets minus liabilities or

total stockholders' equity).............................................. 460,000 Book value in excess of payment ............................ $(30,000)

Allocation to specific accounts based on fair market value:- Inventory........................................................................ 5,000- Land................................................................................ 20,000- Buildings........................................................................ 30,000

Bargain purchase (fair market value inexcess of purchase price)............................................... $(85,000 )


23. (continued)Allocation of $85,000 Bargain Purchase to Noncurrent Assets:

Fair Market $85,000Accounts Value Percentage ReductionLand $200,000 40 $(34,000)Buildings 250,000 50 (42,500)Equipment 50,000 10 (8500 )

$500,000 100 $(85,000 )

CONSOLIDATED TOTALS

-Cash - $38,000 - add the two book values after subtracting the two payments made by the parent.

-Receivables - $360,000 - add the two book values.-Inventory - $505,000 - add the two book values plus the $5,000 allocation

to the subsidiary's inventory based on Its market value.-Land - $366,000 - add the two book values plus the $20,000 allocation to

the subsidiary's land based on Its market value less the $34,000 reduction caused by the bargain purchase.

-Buildings - $627,500 - add the two book values plus the $30,000 allocation to the subsidiary's buildings based on its market value less the$42,500 reduction caused by the bargain purchase.

-Equipment - $201,500 - add the two book values less the $8,500 reduction caused by the bargain purchase.

-Goodwill -0- - no residual exists because the price was below the fair market value of the subsidiary's net assets.

-Total assets - $2,098,000 - summation of the individual figures.

-Accounts payable - $190,000 - add the two book values.-Long-term liabilities - $830,000 - add the two book values plus the debt

incurred by the parent in acquiring the subsidiary.-Common stock - $130,000 - the parent's book value after the issuance of

the shares to purchase the subsidiary.-Additional paid-in capital - $528,000 - the parent's book value after the

issuance of the shares to purchase the subsidiary but less the stock issuance costs.

-Retained earnings - $420,000 - parent company balance only because this combination is a purchase.

-Total liabilities and equities - $2,098,000 - summation of the individual figures.


23. (continued)b.

LEE COMPANY AND CONSOLIDATED SUBSIDIARYWorksheet

January 1, 2002

Lee Grant Consolidation Entries ConsolidatedAccounts Company* Company Debit Credit Totals

Debit BalancesCash............................................ $ 18,000 $ 20,000 $ 38,000Receivables ............................... 270,000 90,000 360,000Inventory .................................... 360,000 140,000 (A) 5,000 505,000Land ............................................ 200,000 180,000 (A) 20,000 (A) 34,000 366,000Buildings (net) ........................... 420,000 220,000 (A) 30,000 (A) 42,500 627,500Equipment (net) ......................... 160,000 50,000 (A) 8,500 201,500Investment in Grant .................. 430,000 - 0 - (A) 30,000 (S)460,000 - 0 -

Total debits ........................... $1,858,000 $700,000 $2,098,000

Credit BalancesAccounts payable ..................... $ 150,000 $ 40,000 $ 190,000Long-term liabilities .................. 630,000 200,000 830,000Common stock .......................... 130,000 120,000 (S) 120,000 130,000Additional paid-in capital ......... 528,000 -O- 528,000Retained earnings, 1/1/02 ......... 420,000 340,000 (S) 340,000 420,000

Total credits.......................... $1,858,000 $700,000 $2,098,000

Lee's accounts have been adjusted for acquisition entries (see part a.).


24. (20 Minutes) (Prepare consolidation worksheet for a purchase.) An allocation of Landover's purchase price is necessary as a prerequisite for creating the consolidation worksheet.

Purchase price................................................................. $295,000Book value of Smithers................................................... 220,000

Cost in excess of book value.................................... $ 75,000

Excess cost allocated to specific assets andliabilities based on fair market value:

—Land......................................................... $50,000—Buildings................................................. 20,000—Equipment............................................... (10,000)—Notes payable......................................... (5,000) 55,000

Goodwill........................................................... $ 20,000

Consolidation EntriesLandover Smithers Debit Credit

Consolidated Totals

Cash $ 36,000 $ 16,000 $ 52,000Receivables 116,000 52,000 168,000Inventory 144,000 90,000 234,000Investment in

Smithers (cost) 295,000 -0- (S)220,000(A) 75,000

Land 210,000 20,000 (A) 50,000 280,000Buildings (net) 640,000 60,000 (A) 20,000 720,000Equipment (net) 308,000 40,000 (A) 10,000 338,000Goodwill -0 - -0- (A) 20,000 20,000

Total assets $1,749,000 $278,000 $1,812,000

Accounts payable $ 88,000 $ 8,000 $ 96,000Notes payable 510,000 50,000 (A) 5,000 565,000Common stock 380,000 80,000 (S) 80,000 380,000Retained earnings 771,000 140,000 (S)140,000 771,000

Total liabilitiesand equities $1,749,000 $278,000 $1,812,000


Answers to Pooling Method Problems

25. C26. D27. B28. C Premtick’s Journal entry to create the combination is based on the book

value of Starten. However, the shares issued have a par value that is $10,000 larger than the $300,000 contributed capital of Starten. Normally, this excess would be recorded as a reduction to Premtick’s additional paid in capital. Since Premtick does not have an Additional Paid-in Capital account, the reduction is made to retained earnings in the following entry:

Investment in Starten (book value)................ 700,000Common Stock (par value)........................ 310,000Retained Earnings...................................... 390,000(book value of Starten less $10,000)

This entry raises Premtick’s retained earnings to $1,190,000

29. B As a pooling of interests, Atkins’ journal entry to create this combination is based on the book value of Waterson ($175,000). The 51,000 shares being issued have a par value of $51,000. Since Waterson reports total contributed capital of $65,000 (common stock plus additional paid-in capital), Atkins must record $14,000 as its own additional paid-in capital. Atkins also records $110,000 in retained earnings, a balance that equals that of Waterson. The $14,000 and $110,000 additions bring Atkins’ equity accounts to $104,000 and $410,000.

30. B Book values are combined in a pooling of interests.

31. B In a pooling, all income is combined retroactively.

32. B In issuing its shares, Allen will credit $80,000 to its Common Stock account (par value). A credit of $20,000 will then be made to Allen’s Additional Paid-in Capital to equal the $100,000 total paid-in capital shown by Tucker. This entry increases Allen’s APIC account to $30,000. In the same manner Tucker’s beginning retained earnings is added to Allen’s beginning retained earnings.


33. B In issuing its shares, Allen will credit $160,000 to its Common Stock account (par value). A reduction of $60,000 is, therefore, necessary to Allen’s Additional Paid-in Capital account to arrive at the $100,000 total paid-in capital shown by Tucker. However, since Allen is only reporting $10,000 in APIC, the remaining $50,000 decrease is made to retained earnings. Thus, consolidated additional paid-in capital has become zero and retained earnings is:

Allen’s balance at January 1, 2000....................................... $130,000Tucker’s balance at January 1, 2000.................................... 150,000Reduction explained above because

APIC has been decreased to zero................................... (50,000)Consolidated retained earnings................................. $230,000

34. (20 Minutes) (Asks for verbal discussion of the pooling of interests method.)a. In a pooling of interests, the recorded book value of all assets and

liabilities of the two separate companies are simply added to become the recorded amounts for the combined corporation. The existing basis of accounting is continued. A business combination that is accounted for as a pooling of interests is a combination of the ownership interests of two previously separated companies. Since only the ownership changes, no event has occurred that mandates a change in recorded values. The existing basis of accounting continues for both companies. A change in company ownership should not necessitate adjustments in the reported value of either assets or liabilities.

b. For a pooling of interests, the registration fees and any other direct costs relating to effecting the business combination should be deducted in determining the net income of the resulting combined corporation for the period in which the expenses are incurred. In this manner, the recorded value of all assets, liabilities, and capital accounts are not changed by the combination.

c. Although the companies combined during the year, in a pooling of interests, the combination is reported as if the companies had always been combined. Revenues for both companies for the entire year are reported as well as expenses. Operations are combined retroactively.


35. (25 Minutes) (Overview of the steps in applying the pooling of interests method.)

a. The book value is found by subtracting assets from liabilities. For Harcourt, the assets are $1,490,000 and the liabilities are $800,000 for a book value of the company’s net assets of $690,000. The same total can be derived from the stockholders’ equity accounts after closing out revenues and expenses.

b. In a pooling of interests, stock issuance costs and all other direct costs of creating the business combination are expensed as incurred.

c. Poolings of interest are recorded retroactively. For this reason, the entry to record the issuance of the shares is made using the book value of Harcourt as of the first day of the year. That figure can be found from the stockholders’ equity accounts, using the beginning retained earnings figure for the period ($100,000 + $90,000 + $440,000 or $630,000).

In this entry, Lee’s common stock must be recorded at its par value of $200,000. Since Harcourt’s total contributed capital is only $190,000, a reduction in additional paid-in capital must be shown of $10,000.

Investment in Harcourt (book value)........................ 630,000Additional Paid-in Capital.......................................... 10,000

Common Stock (par value).................................. 200,000Retained Earnings, 1/1/00 (equal to Harcourt’s beginning balance)........ 440,000

d. The par value of the shares issued is reduced which changes the amount recorded to additional paid-in capital.

Investment in Harcourt (book value)........................ 630,000Common Stock (par value).................................. 20,000Additional Paid-In Capital.................................... 170,000Retained Earnings, 1/1/00 (equal to Harcourt’s beginning balance)......... 440,000


35. (continued)e. The par value of the shares issued is increased which changes the

amount of the reduction in additional paid-in capital.

Investment in Harcourt (book value)........................ 630,000Additional Paid-In Capital.......................................... 110,000

Common Stock (par value).................................. 300,000Retained Earnings, 1/1/00 (equal to Harcourt’s beginning balance)......... 440,000

f. In a pooling of interests, the companies are consolidated retroactively as if they had always been together. Hence, the revenues and expenses (both currently and in the past) from the two companies are included in the reported figures. Since a change in ownership occurred rather than a change in the companies, the previous operations are still considered to be applicable.

g. The subsidiary’s assets and liability accounts will be consolidated at their book values. The revenue and expense figures of the subsidiary are also recorded at their book values. The parent must record the issuance of the new shares and the payment of the stock issuance costs. The equity accounts of Harcourt do not directly affect the consolidation but do have an impact on the amounts recorded by Lee at the time that the new shares are issued.

h. See appendix to this chapter.


36. (10 Minutes) (Consolidated balances for a pooling of interests method.)

a. Buildings (book values are used in a poolingof interests)................................................................. $ 900,000

b. Goodwill is never recognized in a pooling of interests.

c. Expenses (operations are consolidated retroactivelyin a pooling of interests)........................................... $ 500,000

Stock issuance costs and combination costs.............. 59,000Balance to be consolidated....................................... $ 559,000

d. Retained earnings, 1/1/00—Winston (operations areconsolidated retroactively in a pooling of interests)... $1,100,000

37. (40 Minutes) (Consolidated balances for a pooling of interests.)

a. In a pooling of interests, the book values are added together. However, Bingham's issuance of 10,000 shares of stock must first be recorded as well as the $10,000 in direct combination costs and the $20,000 in stock issue costs. Both of these costs must be expensed in a pooling of interests.

In recording the stock issue, Bingham reduces additional paid-in capital by $10,000 so that the total paid-in capital being recorded ($100,000 par value less $10,000 reduction) equals the total paid-in capital of Laredo ($90,000 common stock). Book value at 1/1/00 is determined from stockholders' equity accounts.

Bingham's Journal Entries

Investment in Laredo (book value at 1/1/00)........ 160,000Additional Paid-in Capital...................................... 10,000

Common Stock (par value).............................. 100,000Retained Earnings, 1/1/00

(equal to balance reported by Laredo)...... 70,000Expenses................................................................. 30,000

Cash................................................................... 30,000


37. (continued)

CONSOLIDATED BALANCES POOLING OF INTERESTS(Unless indicated, the balances for Bingham and Laredo are added.)

Revenues............................................................................... $180,000Expenses (balances for the two companies

plus the $30,000 paid above).......................................... (140,000)Net income (revenues minus expenses)............................ 40,000Retained earnings, 1/1/00

(Bingham's balance after entry)..................................... 280,000Dividends............................................................................... (30,000)Retained earnings, 12/31/00 (beginning balance

plus net income less dividends).................................... 290,000Cash (balances for the two companies

less the $30,000 paid above).......................................... 70,000Receivables........................................................................... 120,000Inventory................................................................................ 170,000Buildings and equipment (net)............................................ 300,000Investment in Laredo

(always eliminated in a consolidation).......................... -0-Goodwill (not recognized in a pooling).............................. -0-Total assets (summation)..................................................... 660,000Current liabilities................................................................... 30,000Long-term liabilities.............................................................. 120,000Common stock

(Bingham's balance after above entry).......................... 210,000Additional paid-in capital (Bingham's balance

after adjustment for above entry).................................. 10,000Retained earnings, 12/31/00 (computed above)................. 290,000Total liabilities and stockholders' equity

(summation)..................................................................... 660,000


38. a. As a pooling of interests, the book values of the two companies will serve as the basis for consolidated figures. A journal entry must be recorded by Parrot to reflect the issuance of its common stock (12,000 shares in this case). Total paid-in capital should be $300,000, Sun's book value.

Investment in Sun (book value on 1/1/00).......... 540,000Common Stock (Parrot) (par value)............... 240,000Additional Paid-in Capital............................... 60,000Retained Earnings, 1/1/00 (Parrot)................. 240,000

Inventory—$620,000 (book values from both companies) Land—$730,000 (book values from both companies)Buildings—$870,000 (book values from both companies)Goodwill— -0- (goodwill is not recognized in a pooling of interests) Revenues—$1,290,000 (book values from both companies)Additional Paid-in Capital—$130,000 (Parrot's book value after

inclusion of journal entry recorded above)Expenses—$1,230,000 (book values from both companies)Retained Earnings, 1/1/00—$630,000 (Parrot's book value after inclusion

of journal entry recorded above)


38. (continued)

b. Parrot must first record its issuance of 16,000 shares of stock. For this entry, the investment account is recorded at the $540,000 book value of Sun at the beginning of the current year (stockholders' equity using beginning retained earnings). Paid-in capital accounts must be recorded by Parrot at a total value of $300,000 to agree with the sum of those same accounts as reported by Sun. Since the par value of the issued stock is $320,000, additional paid-in capital must be reduced by $20,000. The Retained Earnings is then recognized at $240,000 to reflect the income of Sun Company earned prior to the formation of the business combination. The entry prepared by Parrot would be as shown below. The $8,000 stock issuance cost is recorded as an expense.

Investment in Sun (book value)..................... 540,000Additional Paid-in Capital (Parrot)................. 20,000

Common Stock (Parrot) (par value).......... 320,000Retained Earnings, 1/1/00 (Parrot)............ 240,000

Inventory—$620,000 (book values from both companies) Land—$730,000 (book values from both companies)Buildings—$870,000 (book values from both companies)Goodwill—-0- (goodwill is not recognized in a pooling of interests)Revenues—$1,290,000 (book values from both companies)Additional Paid-in Capital—$50,000 (Parrot's book value after adjustment for initial investment entry shown above)Expenses—$1,238,000 (book values from both companies plus $8,000 stock issuance costs)Retained Earnings, 1/1/00—$630,000 (Parrot's book value after adjustment for initial investment entry [above] which increased that balance based on the retained earnings of Sun)


38. (continued)

c. As a pooling of interests, book value will serve as the basis for the consolidated figures. Again, Parrot must first record the issuance of Its shares (19,000 in this case). The investment account is recorded at the $540,000 book value of Sun as of the beginning of the current year. Paid-in capital accounts should be recorded in this entry at $300,000 to agree with the total of those same accounts as reported by Sun. However, after recording the $380,000 par value of the stock issued, a $80,000 decrease in Additional Paid-in Capital would be necessary. Since Parrot's Additional Paid-in Capital account only shows a $70,000 balance, the remaining $10,000 is offset against Retained Earnings. To absorb this amount, Parrot will record a net increase of only $230,000 in Retained Earnings rather than the $240,000 balance presently reported by Sun.

Investment in Sun (book value)........................... 540,000Additional Paid-in Capital (Parrot)...................... 70,000

Common Stock (Parrot) (par value)............... 380,000Retained Earnings, 1/1/00 (Parrot)................. 230,000

Inventory—$620,000 (book values from both companies)Land— 730,000 (book values from both companies)Buildings—$870,000 (book values from both companies)Goodwill—-0- (goodwill is not recognized in a pooling of interests)Revenues $1,290,000 (book values from both companies)Additional Paid-in Capital—-0- (account balance is removed by Parrot in

the process of recording the issuance of stock as shown above)Expenses—$1,239,000 (book values from both companies plus $9,000In direct combination costs)Retained Earnings, 1/1/00-$620,000 (Parrot's book value after initial

investment entry which increased this balance by $230,000 as shown in entry above)


39. (30 Minutes) (Consolidated balances for a pooling of interests)As a pooling of interests, the stock being issued by Hope must be recorded based on the book value of Kaisley's stockholders' equity accounts. However, Kaisley's total contributed capital of $430,000 is less than the par value ($450,000) of the shares issued by Hope. Thus, additional paid-in capital is reduced here by $20,000. Since this combination is a pooling of interests, the transaction is recorded based on the beginning of year book value as shown by the stockholders' equity accounts.Investment in Kaisley (book value as of 1/1/00)...... 830,000Additional Paid-in Capital

(to arrive at $430,000 contributed capital).......... 20,000Common Stock (par value)............................. 450,000Retained Earnings (book value at 1/1/00)..... 400,000

The combination costs are recorded by Hope as expenses since this combination is a pooling of interests.Expenses..................................................................... 50,000

Cash....................................................................... 50,000CONSOLIDATED BALANCES (as a pooling of interests, the balances are derived from book values except where affected by the above entries)Revenues (add book values).......................................... $ 800,000Expenses (add book values and combination costs).. 530,000Net income

(subtract consolidated expenses from consolidated revenues)............................................. 270,000

Retained Earnings, 1/1(Hope's balance after recording the above entry)... 1,000,000

Dividends Paid (add book values)................................. 180,000Retained Earnings, 12/31 (beginning consolidated

balance plus net income less dividends)................ 1,090,000Cash (add book values and subtract payment

for combination costs)............................................... 180,000Receivables and inventory (add book values)............. 400,000Buildings (add book values)........................................... 900,000Equipment (add book values)........................................ 1,100,000Tool Assets (add consolidated totals).......................... 2,580,000Liabilities (add book values).......................................... 400,000Common Stock (Hope's balance plus

newly-issued shares)................................................. 1,080,000Additional Paid-in Capital

(Hope's balance less reduction recorded above). . . 10,000Retained Earnings, 12/31 (computed above)................ 1,090,000Total Liabilities and Stockholders' Equity (add

consolidated totals)................................................... 2,580,000


40. (40 Minutes) (Create worksheet for a pooling of interests. Also make entries if created as a statutory merger.):

a. Green Co. must initially prepare a journal entry to record the issuance of 8,000 shares of Its stock. This entry is based on the $280,000 book value of Gold Co. as of January 1, 2000: the $70,000 book value of Gold's paid-in capital plus the $210,000 balance in Gold's retained earnings as of January 1, 2000:

Green's Financial Records

Investment in Gold Co. (book value).................... 280,000Additional Paid-in Capital...................................... 10,000

Common Stock (par value).............................. 80,000Retained Earnings, 1/1/00................................ 210,000

The $10,000 reduction in additional paid-in capital in this entry brings total paid-in capital down to $70,000, an amount equivalent to Gold's total paid-in capital.

Since this combination is a pooling of interests, Green will record as an expense the $12,000 that It pays for direct consolidation costs.

Green's Financial Records

Expenses................................................................. 12,000Cash................................................................... 12,000

After adjusting Green's account balances for these two entries, the worksheet that follows can be produced.


40. a. (continued)GREEN CO. AND GOLD CO.

Consolidation WorksheetFor Year Ending December 31, 2000

Consolidation Entries Consolidated

Accounts Green Co. Gold Co. Debit Credit TotalsSales............................................ $ (300,000) $(190,000) $ (490,000)Expenses.................................... 212,000 110,000 322,000Net income.................................. $ (88,000 ) $ (80,000 ) $ (168,000 ) Retained earnings, 1/1/00.......... $ (610,000) $(210,000) (S)210,000 $ (610,000)Net income (above).................... (88,000) (80,000) (168,000)Dividends paid............................ 30,000 --0-- 30,000Retained earnings, 12/31/00..... $ (668,000 ) $(290,000 ) $ (748,000 )

Current assets............................ $ 288,000 $ 100,000 $ 388,000Investment in Gold Co............... 280,000 --0-- (S)280,000 --0--Land............................................. 100,000 90,000 190,000Buildings..................................... 400,000 280,000 680,000Total assets................................ $ 1,068,000 $ 470,000 $ 1,258,000Liabilities..................................... $ (90,000) $(110,000) $ (200,000)Common stock........................... (240,000) (60,000) (S)60,000 (240,000)Additional paid-in capital........ (70,000) (10,000) (S)10,000 (70,000)Retained earnings, 12/31/00...... (668,000 ) (290,000 ) (748,000 ) Total liabilities and equities...... $(1,068,000 ) $(470,000 ) $(1,258,000 )

Parentheses indicate a credit balance.Green's accounts have been adjusted for the issuance of 8,000shares of stock and payment of attorneys' and accountants' fees.


40. (continued)

b. Green will initially record the same two entries shown in a., the first for the issuance of the 8,000 shares and the second for the payment of the $12,000 in direct combination costs. Subsequently, the $280,000 investment in Gold Company account will be removed and replaced by the specific accounts of Gold. As a pooling of interests, all assets and liabilities will be entered at book value. In addition, current revenues and expenses of Gold will be recorded even though they were incurred prior to the creation of the combination. Note that the investment holds a January 1, 2000, balance while the assets and liabilities being recorded are set at December 31, 2000, balances. The difference is reconciled by recording Gold's revenues and expenses for the period.

Current Assets...................................................... 100,000Land....................................................................... 90,000Buildings................................................................ 280,000Expenses............................................................... 110,000

Sales................................................................. 190,000Liabilities.......................................................... 110,000Investment in Gold Co.................................... 280,000


41. (40 Minutes) (Determine consolidated balances for a pooling of interests. Prove those figures with a worksheet.)a. As a pooling of interests, the book value of Swathmore will be retained.

Thus, the market value figures given in the problem are not used in producing the consolidation.

Since no investment account appears on Lincoln’s balance sheet, no journal entry has been made for the issuance of the 7,000 shares of stock. The entry is set to arrive at a total paid-in capital of $80,000, the amount reported by Swathmore.

Lincoln's Financial RecordsInvestment in Swathmore (book value on 1/1/00)... . 190,000

Common Stock (par value).................................... 70,000Additional Paid-in CapitaL.................................... 10,000Retained Earnings

(equal to Swathmore's 1/1/00 balance)........... 110,000

CONSOLIDATED TOTALS:—Revenues = $1,530,000 - add the two book values.—Expenses = $970,000 - add the two book values. let income =

$560,000 - subtract consolidated expenses from consolidated revenues.

—Retained earnings, 1/1/00 = $940,000 – Lincoln’s balance after recording the shares issued to create the pooling of interests.

—Dividends paid = $350,000 - add the two book values (since the combination was created at the end of the year, none of the Swathmore's dividends were paid intercompany to Lincoln.)

—Retained earnings, 12/31/00 = $1,150,000 - the consolidated beginning balance plus consolidated net income less consolidated dividends paid cash = $89,000 - add the two book values.

—Receivables = $215,000 - add the two book values.—Inventory = $310,000 - add the two book values.—Land = $340,000 - add the two book values.—Buildings (net) = $900,000 - add the two book values.—Equipment (net) = $370,000 - add the two book values.—Total assets = $2,224,000 - summation of the individual figures.—Accounts payable = $144,000 - add the two book values.—Notes payable = $420,000 - add the two book values. —Common stock = $470,000 - Lincoln's balance after recording the

above entry.—Additional paid-in capital = $40,000 – Lincoln’s balance after

recording the above entry.—Retained earnings = $1,150,000 - computed above.—Total liabilities and equities = $2,224,000 - summation of the

individual figures.41. (continued)


b. Consoli- Consolidation Entries dated

Lincoln Swathmore Debit Credit Totals Revenues $ 990,000 $540,000 $1,530,000Expenses 640,000 330,000 970,000

Net income $ 350,000 $210,000 $ 560,000

Retained earnings, 1/1/00 $ 940,000 $110,000 (S)110,000 $ 940,000

Net income 350,000 210,000 560,000Dividends paid (220,000) (130,000) (350,000 ) Retained earnings,

12/31/00 $1,070,000 $190,000 $1,150,000

Cash $60,000 $ 29,000 $ 89,000Receivables 150,000 65,000 215,000Inventory 190,000 120,000 310,000Investment in

Swathmore 190,000 -0- (S) 190,000 -0-Land 310,000 30,000 340,000Buildings (net) 840,000 60,000 900,000Equipment (net) 320,000 50,000 370,000

Total assets $2,060,000 $354,000 $2,224,000

Accounts payable $ 110,000 $ 34,000 $ 144,000Notes payable 370,000 50,000 420,000Common stock 470,000 50,000 (S)50,000 470,000Additional paid-in

capital 40,000 30,000 (S)30,000 40,000Retained earnings 1,070,000 190,000 1,150,000Total liabilities

and equities $2,060,000 $354,000 $2,224,000

*Lincoln's balances have been adjusted for entry to record issuance of shares tocreate business combination.


42. (70 Minutes) (Consolidation worksheet for a pooling of interests.

a. Several journal entries must be made to the individual financial records before beginning the consolidation process. As a pooling of interests, the expenditures to create this business combination should be recorded by Sherman as an expense.

Sherman Financial RecordsExpenses..................................................................... 20,000

Cash....................................................................... 20,000

Sherman will then record the issuance of 17,000 shares of its common stock. As a pooling of interests, this entry will be based on the $600,000 book value of Atlanta as of the first day of the current year.

Sherman's Journal entry to record these 17,000 shares would be as follows:

Sherman's Financial RecordsInvestment in Atlanta................................................. 600,000

Common Stock (par value of 17,000shares).............................................................. 340,000

Additional Paid-in Capital.................................... 60,000Retained Earnings, 1/1/00

(adjusted book value)..................................... 200,000

In the above entry, the additional paid-in capital was set at $60,000 so that total paid-in capital being recorded would equal Atlanta's book value of $400,000 for its paid-in capital.

After the above entries are posted to the individual financial records, the following consolidation worksheet can be developed.


42. (continued)SHERMAN COMPANY AND ATLANTA COMPANY


Consolidation Entries ConsolidatedAccounts Sherman* Atlanta Debit Credit Totals

Income StatementRevenues................................... $ (600,000) $ (480,000) $(1,080,000)Expenses................................... 560,000 210,000 770,000Net income................................ $ (40,000 ) $ (270,000) $ (310,000)

Statement of Retained EarningsRetained earnings, 1/1/00........ $ (670,000) $ (200,000) (S) 200,000 $ (670,000)Net Income (above)................... (40,000) (270,000) (310,000)Dividends paid.......................... 30,000 - 0 - 30,000Retained earnings, 12/31/00..... $ (680,000 ) $ (470,000 ) $ (950,000 )

Balance SheetCash........................................... $ 90,000 20,000 $ 110,000Receivables (net)...................... 300,000 290,000 590,000Inventory.................................... 440,000 260,000 700,000Investment in Atlanta................ 600,000 (S) 600,000 -0-Land........................................... 280,000 80,000 360,000Buildings (net)........................... 270,000 290,000 560,000Equipment (net)......................... 810,000 320,000 1,130,000

Total assets......................... $ 2,790,000 $ 1,260,000 $ 3,450,000

Accounts payable..................... $ (120,000) (60,000) $ (180,000)Long-term liabilities.................. (960,000) (330,000) (1,290,000)Common stock.......................... (860,000) (300,000) (S) 300,000 (860,000)Additional paid-in capital......... (170,000) (100,000) (S) 100,000 (170,000)Retained earnings, 12/31/00.... (680,000 ) (470,000 ) (950,000 )

Total liabilities and equities $(2,790,000 ) $(1,260,000) $(3,450,000 )

Parentheses indicate a credit balance.*Accounts adjusted for preliminary entries.


42. (continued)

b. Several journal entries must be made to the individual financial records before beginning the consolidation process. As a purchase, the expenditures to create this business combination should be recorded by Sherman as part of the price.

Sherman's Financial RecordsInvestment in Atlanta................................................. 20,000

Cash....................................................................... 20,000

Sherman will then record the issuance of 17,000 shares of Its common stock. As a purchase, this entry will be based on the market value of these shares.

Investment in Atlanta (17,000 x $57)........................ 969,000Common Stock (par value).................................. 340,000Additional Paid-in Capital.................................... 629,000

The allocation of the purchase price is now appropriate.

Purchase Price............................................................ $989,000Book Value, 12/31/00 (after closing entries)............ 870,000Price In excess of book value................................... 119,000Assigned to undervalued land.................................. 60,000Goodwill...................................................................... $ 59,000


42. (continued)SHERMAN COMPANY AND ATLANTA COMPANY


Consolidation Entries ConsolidatedAccounts Sherman* Atlanta** Debit Credit Totals

Income StatementRevenues ............................................. $ (600,000) $ (600,000)Expenses .............................................. 540,000 540,000Net income............................................ $ (60,000 ) $ (60,000 )

Statement of Retained EarningsRetained earnings, 1/1/00.................... $ (470,000) $ (470,000)Net Income (above) ............................. (60,000) (60,000)Dividends paid ..................................... 30,000 30,000Retained earnings, 12/31/00................ $ (500,000 ) $ (500,000 )

Balance SheetCash ...................................................... $ 90,000 20,000 $ 110,000Receivables (net) ................................. 300,000 290,000 590,000Inventory .............................................. 440,000 260,000 700,000Investment in Atlanta .......................... 989,000 --0-- (S) 870,000

.......................................................... (A) 119,000 -0-Land ...................................................... 280,000 80,000 (A) 60,000 420,000Buildings (net) ..................................... 270,000 290,000 560,000Equipment (net).................................... 810,000 320,000 1,130,000Goodwill................................................ --0-- --0-- (A) 59,000 59,000Total assets........................................... $ 3,179,000 $ 1,260,000 $ 3,569,000

Accounts payable ................................ $ (120,000) (60,000) $ (180,000)Long-term liabilities ............................ (960,000) (330,000) (1,290,000)Common stock ..................................... (860,000) (300,000) (S) 300,000 (860,000)Additional paid-in capital .................... (739,000) (100,000) (S) 100,000 (739,000)Retained earnings, 12/31/00 (500,000 ) (470,000 ) (S) 470,000 (500,000 ) Total liabilities and equities $(3,179,000 ) $(1,260,000) $(3,569,000 ) Parentheses indicate a credit balance.*Accounts adjusted for preliminary entries.

**As a purchase, the subsidiary’s revenue, expense, and dividend accounts have been closed out.



Documents

CHAPTER 1 - California State University, Bakersfieldlbacon/chap2.doc · Web viewHowever, the business combination must periodically produce consolidated financial statements encompassing