Chapter 2 Consolidated Statements Date of Acquisition

The consolidation concept Merge two legal entities into one economic entity Generally required with over 50% ownership, that requirement may be relaxed. FASB may move to definition of Control (could exist below 50%). Always ask - what should be left when you put on “one firm” eye glasses.

AssetsLiabilities & Equity Inventory120,000Bond Payable100,000 Land50,000Com. stock, $5 par 10,000 Building250,000Retained earnings310,000 Total420,000Total420,000 Fair Values: Inventory (priority)170,000Bond Payable (priority) 105,000 Land100,000 Building300,000 Patents50,000

Using purchase rules: Goodwill above what price? $515,000 –at $550,000 Goodwill = $35,000 Bargain below what price? $515,000 –at $245,000, $180,000 ($245,000 - $65,000 to priority) is assigned non-priority accounts Extraordinary gain below what price? $65,000 –at $50,000, the extraordinary gain is 15,000

$550,000 Price550,000 Equity (100%  $320,000) 320,000 Excess cost230,000 Adjustments: Inventory (increase to 170,000) 50,000 Bonds payable (decrease liability) (5,000) Land (Increase to 100,000) 50,000 Building (increase to 300,000)50,000 Patents (record) 50,000195,000 Goodwill (record) 35,000

Eliminations for $550,000 price

$245,000 Price245,000 Equity (100%  $320,000) 320,000 Excess cost(75,000) Adjustments: Inventory (increase to $170,000) 50,000 Bonds payable (decrease liability)) (5,000) Land (allocation on next slide) (10,000) Building (allocation on next slide)(130,000) Patents (allocation on next slide) 20,000 (75,000) 0

Allocation

Eliminations for $245,000 price

$50,000 Price50,000 Equity (100%  $320,000) 320,000 Excess cost(270,000) Adjustments: Inventory (increase to $170,000) 50,000 Bonds payable (decrease liability) (5,000) Land (eliminate book value) (50,000) Building (eliminate book value)(250,000)(255,000) Extraordinary gain(15,000)

Eliminations for $50,000 price

For an 80% purchase Use the same subsidiary information for 80% purchase All adjustments are for 80% of fair-book difference Above what price will there be goodwill? $412,000 $515,000  80% = $412,000 We will use $430,000 so goodwill = $18,000 Below what price will there be a bargain? $412,000 $515,000  80% = $412,000 If price was $241,000, $189,000 ($241,000 - [$65,000  80%]) is available for P’s 80% share of non-priority accounts Extraordinary gain below what price? $52,000 80%  $65,000 = $52,000

Analysis: 80% purchase

For 80% interest at 430,000 Price430,000 Equity (80%  $320,000)256,000 Excess cost174,000 Adjustments: Inventory (80%  50,000) 40,000 Bonds payable (80%  5,000) (4,000) Land (80%  50,000) 40,000 Building (80%  50,000) 40,000 Patents (80%  50,000) 40, ,000 Goodwill 18,000

Eliminations for $430,000 price

For 80% interest at $241,000 Price241,000 Equity (80%  $320,000)256,000 Excess cost(15,000) Adjustments: Inventory (80%  50,000) 40,000 Bonds payable (80%  5,000) (4,000) Land (allocation next slide) 2,000 Building (allocation next slide) (74,000) Patents (allocation next slide) 21,000 (15,000) 0

Allocation

Eliminations for $241,000 price

For 80% interest at $500,000 Price500,000 Equity (80%  450,000)360,000 Excess cost140,000 Adjustments: Inventory (80%  40,000)32,000 Land (80%  30,000)24,000 Building (80%  120,000)96,000152,000 Reduce existing goodwill (12,000) On the worksheet, existing goodwill is reduced $12,000 The maximum deduction would be $40,000 (80%  50,000)

Pooling of interests Investment should was at book value Equity transfer applies only to parent ownership percentage (90% or more) Investment always eliminated with no excess.