Question

The Holtz Corporation acquired 80 percent of the 100,000 outstanding voting shares of Devine, Inc., for $6.80 per share on January 1, 2014. The remaining 20 percent of Devine’s shares also traded actively at $6.80 per share before and after Holtz’s acquisition. An appraisal made on that date determined that all book values appropriately reflected the fair values of Devine’s underlying accounts except that a building with a 5-year life was undervalued by $84,000 and a fully amortized trademark with an estimated 10-year remaining life had a $81,000 fair value. At the acquisition date, Devine reported common stock of $100,000 and a retained earnings balance of $254,000.

Following are the separate financial statements for the year ending December 31, 2015:

		Holtz Corporation				Devine, Inc.
Sales		$	(751,000	)		$	(409,250	)
Cost of goods sold			249,000				177,000
Operating expenses			287,000				128,250
Dividend income			(16,000	)			0
Net income		$	(231,000	)		$	(104,000	)
Retained earnings, 1/1/15		$	(753,000	)		$	(324,000	)
Net income (above)			(231,000	)			(104,000	)
Dividends declared			80,000				20,000
Retained earnings, 12/31/15		$	(904,000	)		$	(408,000	)
Current assets		$	147,000			$	186,000
Investment in Devine, Inc			544,000				0
Buildings and equipment (net)			900,000				405,000
Trademarks			147,000				145,000
Total assets		$	1,738,000			$	736,000
Liabilities		$	(514,000	)		$	(228,000	)
Common stock			(320,000	)			(100,000	)
Retained earnings, 12/31/15 (above)			(904,000	)			(408,000	)
Total liabilities and equities		$	(1,738,000	)		$	(736,000	)

At year-end, there were no intra-entity receivables or payables.

a.	Prepare a worksheet to consolidate these two companies as of December 31, 2015. (For accounts where multiple consolidation entries are required, combine all debit entries into one amount and enter this amount in the debit column of the worksheet. Similarly, combine all credit entries into one amount and enter this amount in the credit column of the worksheet.)

     

b.	Prepare a 2015 consolidated income statement for Holtz and Devine. (Enter all amounts as positive values.)

c.	If instead the noncontrolling interest shares of Devine had traded for $5.19 surrounding Holtz’s acquisition date, what is the impact on goodwill?

Answer 1

Part A

HOLTZ CORPORATION AND DEVINE INC.

Consolidated Worksheet

For the year ending December 31, 2018

Accounts	Holtz corporation	Devine Inc.			Noncontrolling interest	Consolidated totals
			Debit	Credit
Sales	(751000)	(409250)				(1160250)
Cost of goods sold	249000	177000				426000
Operating expenses	287000	128250	24900			440150
Dividend income	(16000)	0	16000			0
Separate company net income	(231000)	(104000)
Consolidated net income						(294100)
NI attributable to noncontrolling interest					(15820)	15820
NI attributable to Holtz Corp.						(278280)
Retained earnings, 1/1	(753000)	(324000)	324000	36080		(789080)
Net income	(231000)	(104000)				(278280)
Dividends declared	80000	20000		16000	4000	80000
Retained earnings, 12/31	(904000)	(408000)				(987360)
Current assets	147000	186000				333000
Investment in Devine	544000		36080	580080		0
Buildings and equipment (net)	900000	405000	67200	16800		1355400
Trademarks	147000	145000	72900	8100		356800
Goodwill			161000			161000
Total assets	1738000	736000				2206200
Liabilities	(514000)	(228000)				(742000)
Common stock	(320000)	(100000)	100000			(320000)
Retained earnings 12/31	(904000)	(408000)				(987360)
NCI in Devine, 1/1				145020	(145020)
NCI in Devine, 12/31					(156840)	(156840)
	(1674500)	(664500)	802080	802080		(2206200)

Fair value allocation and amortization

Consideration transferred by Holtz (100000*6.80*80%)	544000
Noncontrolling interest fair value (100000*6.80*20%)	136000
Devine total fair value 1/1/17	680000
Devine book value 1/1/17 (100000+254000)	(354000)
Fair value in excess of book value	326000
Excess fair value assigned to specific accounts based on fair value:		Remaining life	Annual excess amortizations
Building	84000	5	16800
Trademark	81000	10	8100
Goodwill (326000-84000-81000)	161000	indefinite	0
			24900

NI attributable to noncontrolling interest = (104000-24900)*20% = 15820

Change in subsidiary RE from 1/1/17 to 1/1/18 (324000-254000)	70000
Excess amortization for 2017	24900
Adjusted subsidiary RE increase	45100
Percentage of ownership by parent	80%
*C conversion entry	36080

84000-16800 = 67200

81000-8100 = 72900

Part B

HOLTZ CORPORATION AND DEVINE INC.

Consolidated Income Statement

For the year ending December 31, 2018

Sales		$1160250
Cost of goods sold	426000
Operating expenses	440150
Total expenses		866150
Consolidated net income		$294100
To noncontrolling interest (20%)		$58820
To Holtz corporation (80%)		$235280

Part C

Goodwill

decline

to

$128800

Consideration transferred by Holtz (100000*6.80*80%)	544000
Noncontrolling interest fair value (100000*5.19*20%)	103800
Devine fair value	647800
Fair value of Devine’s underlying net assets (100000*5.19)	519000
Goodwill	$128800