Chapter 4, Problem 4.13.2P

To determine

Business combination:

Business combination refers to the combining of one or more business organizations in a single entity. The business combination leads to the formation of combined financial statements. After business combination, the entities having separate control merges into one having control over all the assets and liabilities. Merging and acquisition are types of business combinations.

Consolidated financial statements:

The consolidated financial statements refer to the combined financial statements of the entities which are prepared at the year-end. The consolidated financial statements are prepared when one organization is either acquired by the other entity or two organizations merged to form the new entity. The consolidated financial statements serve the purpose of both the entities about financial information.

Value analysis:

The value analysis in a business combination is an essential part of determining the worth of the acquired entity. The goodwill or gain on acquisition is computed in the value analysis. If the net worth of the acquired entity is less than the consideration paid, then it results in goodwill, and if the net worth of the acquired entity is more than the consideration paid, then it results in gain on the acquisition.

:

Prepare the consolidated worksheet for Company P and Company S for the year ended December 31, 2016.

Explanation of Solution

Prepare the consolidated worksheet for Company P and Company S for the year ended December 31, 2016:

Company P and Company S
Consolidation Worksheet
Year ending December 31, 2016
	Trial Balance		Adjustments
Particulars	Company P	Company S	Debit	Credit	Consolidated income	NCI	Retained earnings	Consolidated Balances
Cash	$92,400	$57,500						$149,900
Accounts receivable	$130,000	$36,000		$14,000				$152,000
Inventory	$105,000	$76,000		$9,000 (EI)				$172,000
Land	$100,000	$100,000						$200,000
Investment in Company S	$381,200			$23,600 (CY1)
			$8,000 (CY2)
				$193,600 (EL)
				$172,000 (D)				$0
Building	$800,000	$150,000	$100,000					$1,050,000
Accumulated Depreciation	($250,000)	($60,000)		$10,000				($320,000)
Equipment	$210,000	$220,000	$50,000	$64,000				$416,000
Accumulated Depreciation	($115,000)	($80,000)		$20,000
			$5,000
			$9,000					($201,000)
Goodwill		$40,000	$65,000					$105,000
Accounts payable	($70,000)	($78,000)	$14,000					($134,000)
Bonds payable		($200,000)						($200,000)
Common stock (Company S)		($10,000)	$8,000 (EL)			($2,000)
Paid-in capital in excess of par (Company S)		($90,000)	$72,000 (EL)			($18,000)
Retained earnings (Company S)		($142,000)	$113,600 (EL)	$43,000 (NCI)
			$3,000
			$600			($67,800)
Common stock (Company P)	($100,000)							($100,000)
Paid-in capital in excess of par (Company P)	($800,000)							($800,000)
Retained earnings (Company P)	($325,000)		$12,000
			$8,000 (BI)
			$35,000				($270,000)
Sales	($800,000)	($350,000)	$90,000 (IS)		($1,060,000)
Cost of goods sold	$450,000	$208,500		$90,000
			$9,000	$8,600	$568,900
Depreciation expense: Building	$30,000	$5,000	$5,000 (A)		$40,000
Depreciation expense: Equipment	$25,000	$23,000	$10,000 (A)
				$9,000	$49,000
Other expenses	$140,000	$92,000			$232,000
Interest expense		$16,000			$16,000
Gain on sale of fixed assets		($24,000)	$24,000		$0
Subsidiary income	($23,600)		$23,600 (CY1)
Dividend declared, Company S		$10,000		$8,000 (CY2)		$2,000
Dividend declared, Company P	$20,000						$20,000
	$0	$0	$664,800	$664,800
Consolidated net income					($154,100)			$0
NCI					($1,460)	$1,460
Controlling interest					($155,560)		($155,560)
Total NCI						($84,340)		($84,340)
Retained earnings of Controlling Interest							($405,560)	$405,560

  Table: (1)

Income Distribution Schedule of Company S
Particulars	Amount
Net income (internally generated)	$ 29,500
Less: Amortization	$ (15,000)
Less: Unrealized profit in ending inventory	$ (4,800)
Less: Gain on equipment	$ (24,000)
Add: Profit realized in beginning inventory	$ 3,000
Add: Gain realized in current year	$ 4,000
Adjusted income	$ (7,300)
Non-controlling share of Company S	$ (1,460)

  Table: (2)

Income Distribution Schedule of Company P
Particulars	Amount
Net income (internally generated)	$ 155,000
Share in adjusted income of Company S	$ (5,840)
Add: Profit realized on beginning inventory	$ 5,600
Add: Gain realized in current year	$ 5,000
Less: Unrealized gain on ending inventory	$ (4,200)
Controlling share of Company P	$ 155,560

  Table: (3)

Working note 1:

Particulars	Amount	Periods	Amortization
Building	$100,000	20	$5,000
Equipment	$50,000	5	$10,000
Goodwill	$65,000
Total adjustments	$215,000

  Table: (4) Working note 2:

Particulars	Annual amortization	Current year	Prior years	Total
Building	$5,000	$5,000	$5,000	$10,000
Equipment	$10,000	$10,000	$10,000	$20,000
Total	$15,000	$15,000	$15,000	$30,000

  Table: (5)

Working note 3:

Adjustments and eliminations:

• CY1: Income of subsidiary eliminated which is about the current year.
• CY2: The dividend of the current year eliminated.
• EL: The interest of Company P eliminated from equity of subsidiary.
• D: the excess of fair value distributed to NCI and Controlling interest.
• A: Amortization expense eliminated.
• IS: Inter-company sales eliminated.
• BI: The unrealized profit in beginning inventory eliminated.
• EI: Profit in ending inventory eliminated.