homework 3

Solution 3-19

Part a: Goodwill Impairment Test—Step 1

Total fair Carrying Potential goodwill

value value impairment?

Sand Dollar $510,000 < $530,000 yes

Salty Dog 580,000 < 610,000 yes

Baytowne 560,000 > 280,000 no

Part b: Goodwill Impairment Test—Step 2 (Sand Dollar and Salty Dog only)

Sand Dollar—total fair value $510,000

Fair values of identifiable net assets

Tangible assets $190,000

Trademark 150,000

Customer list 100,000

Liabilities (30,000 ) 410,000

Implied value of goodwill 100,000

Carrying value of goodwill 120,000

Impairment loss $20,000

Salty Dog—total fair value $580,000

Fair values of identifiable net assets

Tangible assets $200,000

Unpatented technology 125,000

Licenses 100,000 425,000

Implied value of goodwill 155,000

Carrying value of goodwill 150,000

No impairment—implied value > carry value -0-

Part c:

No changes in tangible assets or identifiable intangibles are reported based on goodwill impairment testing. The sole purpose of the valuation exercise is to estimate an implied value for goodwill. Destin will report a goodwill impairment loss of $20,000, which will reduce the amount of goodwill allocated to Sand Dollar.

However, because the fair value of Sand Dollar’s trademark is less than its carrying amount, the account should be subjected to a separate impairment testing procedure to see if the carrying value is “recoverable” in future estimated cash flows.

Solution 3-20

Fair Value Allocation and Annual Amortization:

Acquisition fair value (consideration transferred) ......................... $490,000

Book value (assets minus

liabilities or total stockholders'

equity) ..................................................................................... (400,000)

Excess fair value over book value ................................................. $ 90,000

Excess fair value assigned to specific

accounts based on individual fair values Remaining Annual excess

life amortizations

Land ................................................ $10,000 -- --

Buildings ...................................... 40,000 4 yrs. $10,000

Equipment ...................................... (20,000) 5 yrs. (4,000)

Total assigned to specific

accounts ................................. 30,000

Goodwill ......................................... 60,000 indefinite -0-

Total ............................................... $90,000 $6,000

Consolidation Entries as of December 31, 2014

Entry S

Common stock—Abernethy.................................................... 250,000

Additional paid-in capital ....................................................... 50,000

Retained earnings—1/1/14 ...................................................... 100,000

Investment in Abernethy .................................................. 400,000

(To eliminate stockholders' equity accounts of subsidiary)

Entry A

Land ........................................................................................ 10,000

Buildings ................................................................................. 40,000

Goodwill .................................................................................. 60,000

Equipment ......................................................................... 20,000


(To recognize allocations attributed to fair value of specific accounts at acquisition date with residual fair value recognized as goodwill).

Entry I

Equity in subsidiary earnings .................................................. 74,000


(To eliminate $80,000 income accrual for 2014 less $6,000 amortization

recorded by parent using equity method)

Entry D

Investment in Abernethy ......................................................... 10,000

Dividends declared ........................................................... 10,000

(To eliminate intra-entity dividend transfers)

Entry E

Depreciation expense............................................................... 6,000

Equipment................................................................................ 4,000

Buildings............................................................................ 10,000

(To recognize current year amortization expense)


Entry S

Common stock—Abernethy ................................................... 250,000

Additional paid-in capital ........................................................ 50,000

Retained earnings—1/1/15....................................................... 170,000


(To eliminate beginning stockholders' equity of subsidiary—the Retained Earnings account has been adjusted for 2014 income and dividends. Entry *C is not needed because equity method was applied.)

Entry A

Land ........................................................................................ 10,000

Buildings ................................................................................. 30,000

Goodwill .................................................................................. 60,000

Equipment ......................................................................... 16,000


(To recognize allocations relating to investment—balances shown here are as of beginning of current year [original allocation less excess amortizations for the prior period])

Entry I

Equity in subsidiary earnings .................................................. 104,000


(To eliminate $110,000 income accrual less $6,000 amortization recorded by parent during 2015 using equity method)

Entry D

Investment in Abernethy ......................................................... 30,000

Dividends declared ........................................................... 30,000

(To eliminate intra-entity dividend transfers)

Entry E

Same as Entry E for 2014

Solution 3-21

Acquisition-date allocation and annual excess fair value amortizations:

Acquisition date value (consideration paid) ............................ $500,000

Book value .............................................................................. (400,000)

Excess price paid over book value .......................................... $100,000

Excess price paid assigned to specific Remaining Annual excess

accounts based on fair values life amortizations

Equipment $ 20,000 5 yrs. $4,000

Long-term liabilities 30,000 4 yrs. 7,500

Goodwill 50,000 indefinite -0-

Total $100,000 $11,500

Consolidation entries as of December 31, 2014

Entry S

Common stock—Abernethy .................................................. 250,000

Additional paid-in capital ...................................................... 50,000

Retained earnings—1/1/14 .................................................... 100,000

Investment in Abernethy.................................................. 400,000

(To eliminate stockholders' equity accounts of subsidiary)

Entry A

Equipment ............................................................................. 20,000

Long-term liabilities .............................................................. 30,000

Goodwill ................................................................................ 50,000

Investment in Abernethy ................................................. 100,000

(To recognize allocations determined above in connection with acquisition-date fair values)

Entry I

Dividend income ................................................................... 10,000

Dividends declared .......................................................... 10,000

(To eliminate intra-entity dividend declarations recorded by parent as income)

Entry E

Depreciation expense ............................................................. 4,000

Interest expense...................................................................... 7,500

Equipment........................................................................ 4,000

Long-term liabilities......................................................... 7,500

(To recognize 2014 amortization expense)


Entry *C

Investment in Abernethy ....................................................... 58,500

Retained earnings—1/1/15 (Chapman) ........................... 58,500

(To convert parent company figures to equity method by recognizing subsidiary's increase in book value for prior year [$80,000 net income less $10,000 dividend declaration] and excess amortizations for that period [$11,500])

Entry S

Common stock—Abernethy .................................................. 250,000

Additional paid-in capital ...................................................... 50,000

Retained earnings—1/1/15 .................................................... 170,000


(To eliminate beginning of year stockholders' equity accounts of subsidiary. The retained earnings balance has been adjusted for 2014 net income and dividends)

Entry A

Equipment ............................................................................. 16,000

Long-term liabilities .............................................................. 22,500

Goodwill ................................................................................ 50,000


(To recognize allocations relating to investment—balances shown here are as of the beginning of the current year [original allocation less excess amortizations for the prior period])

Entry I

Dividend income ................................................................... 30,000

Dividends declared ................................................... 30,000

(To eliminate intra-entity dividend declarations recorded by parent as income)

Entry E

Same as Entry E for 2014

Solution 3-28

a. O’Brien acquisition-date fair value ......................................... $550,000

O’Brien book value ................................................................. (350,000)

Fair value in excess of book value .......................................... $200,000

Excess assigned to specific Annual

accounts based on fair value Remaining excess

life amortizations

Trademarks ........................................... $100,000 indefinite -0-

Customer relationships......................... 75,000 5 yrs. $15,000

Equipment ............................................. (30,000) 10 yrs. (3,000)

Goodwill ............................................... 55,000 indefinite -0-

Total ...................................................... $200,000 $12,000

If the partial equity method were in use, the Income of O’Brien account would have had a balance of $222,000 (100% of O’Brien's reported income for the period). If the initial value method were in use, the Income of O’Brien account would have had a balance of $80,000 (100% of the dividends declared by O’Brien). The Income of O’Brien balance is an equity accrual of $222,000 (100% of O’Brien’s reported income) less excess amortizations of $12,000 (as computed above). Thus, the equity method must be in use.

b. Students can develop consolidated figures conceptually, without relying on a worksheet or consolidation entries. Thus, part b. asks students to determine independently each balance to be reported by the business combination.

Revenues = $1,645,000 (the accounts of both companies combined)

Cost of goods sold = 528,000 (the accounts of both companies combined)

Amortization expense = $40,000 (the accounts of both companies and the acquisition-related adjustment of $15,000)

Depreciation expense = $142,000 (the accounts for both companies and the acquisition-related depreciation adjustment of $3,000)

Income from O’Brien = $0 (the balance reported by the parent is removed and replaced with the subsidiary’s individual revenue and expense accounts)

Net Income = 935,000 (consolidated revenues less expenses)

Retained earnings, 1/1 = $700,000 (only the parent's retained earnings figure is included)

Dividends declared = $142,000 (the subsidiary's dividends were attributable to the parent and, thus, as an intra-entity transfer are eliminated)

Retained earnings, 12/31 = $1,493,000 (the beginning balance for the parent plus consolidated net income less consolidated [parent] dividends)

Cash = $290,000 (the accounts of both companies are added together)

Receivables = $281,000 (the accounts of both companies are combined)

Inventory = $310,000 (the accounts of both companies are combined)

Investment in O’Brien = $0 (the parent’s balance is removed and replaced with the subsidiary’s individual asset and liability accounts)

Trademarks = $634,000 (the accounts of both companies are added together plus the 100,000 fair value adjustment)

Customer relationships = $60,000 (the initial $75,000 fair value adjustment less $15,000 amortization expense)

Equipment = $1,170,000 (both company’s balances less the $30,000 fair value adjustment net of $3,000 in depreciation expense reduction)

Goodwill = $55,000 (the original allocation)

Total assets = $2,800,000 (summation of consolidated balances)

Liabilities = $907,000 (the accounts of both companies are combined)

Common stock = $400,000 (parent balance only)

Retained earnings, 12/31 = $1,493,000 (computed above)

Total liabilities and equities = 2,800,000 (summation of consolidated balances)

c. PATRICK COMPANY AND CONSOLIDATED SUBSIDIARY

Consolidation Worksheet

For Year Ending December 31

Consolidation EntriesConsolidated

Accounts Patrick O’Brien Debit Credit Totals

Revenues (1,125,000) (520,000) (1,645,000)

Cost of goods sold 300,000 228,000 528,000

Depreciation expense 75,000 70,000 (E) 3,000 142,000

Amortization expense 25,000 -0- (E) 15,000 40,000

Income from O’Brien (210,000) -0 - (I) 210,000 -0-

Net income (935,000) (222,000) (935,000)

Retained earnings, 1/1 (700,000) (250,000) (S)250,000 (700,000)

Net income (above) (935,000) (222,000) (935,000)

Dividends declared 142,000 80,000 (D) 80,000 142,000

Retained earnings, 12/31 (1,493,000) (392,000) (1,493,000)

Cash 185,000 105,000 290,000

Receivables 225,000 56,000 281,000

Inventory 175,000 135,000 310,000

Investment in O’Brien 680,000 (D) 80,000 (S) 350,000

(A) 200,000 -0-

(I) 210,000

Trademarks 474,000 60,000 (A) 100,000 634,000

Customer relationships -0- -0- (A) 75,000 (E) 15,000 60,000

Equipment (net) 925,000 272,000 (E) 3,000 (A) 30,000 1,170,000

Goodwill -0 - -0 - (A) 55,000 55,000

Total assets 2,664,000 628,000 2,800,000

Liabilities (771,000) (136,000) (907,000)

Common stock (400,000) (100,000) (S)100,000 (400,000)

Retained earnings (above) (1,493,000) (392,000) (1,493,000)

Total liabilities and equity (2,664,000) (628,000) 888,000 888,000 (2,800,000)

460,000340,000 800,000

Royalty agreements 920,000 380,000 (A) 20,000 (E) 10,000 1,310,000

Trademark -0- -0- (A) 30,000 (E) 5,000 25,000

Total assets 2,900,000 1,235,000 3,700,000

Liabilities (780,000) (470,000) (1,250,000)

Preferred stock (300,000) -0- (300,000)

Common stock (500,000) (100,000) (S) 100,000 (500,000)

Additional paid-in capital (300,000) (30,000) (S) 30,000 (300,000)

Retained earnings 12/31 (1,020,000) (635,000) (1,350,000)

Total liabilities and equity (2,900,000) (1,235,000) 890,000 890,000 (3,700,000)

homework 3

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