Question

On January 1, 2018, Brooks Corporation exchanged $1,183,000 fair-value consideration for all of the outstanding voting stock of Chandler, Inc. At the acquisition date, Chandler had a book value equal to $1,105,000. Chandler’s individual assets and liabilities had fair values equal to their respective book values except for the patented technology account, which was undervalued by $204,000 with an estimated remaining life of six years. The Chandler acquisition was Brooks’s only business combination for the year.

In case expected synergies did not materialize, Brooks Corporation wished to prepare for a potential future spin-off of Chandler, Inc. Therefore, Brooks had Chandler maintain its separate incorporation and independent accounting information system as elements of continuing value.

On December 31, 2018, each company submitted the following financial statements for consolidation. Dividends were declared and paid in the same period.

	Brooks Corp.				Chandler Inc.
Income Statement
Revenues	$	(640,000	)		$	(587,000	)
Cost of goods sold		255,000				203,000
Gain on bargain purchase		(126,000	)			0
Depreciation and amortization		150,000				151,000
Equity earnings from Chandler		(199,000	)			0
Net income	$	(560,000	)		$	(233,000	)
Statement of Retained Earnings
Retained earnings, 1/1	$	(1,835,000	)		$	(805,000	)
Net income (above)		(560,000	)			(233,000	)
Dividends declared		100,000				40,000
Retained earnings, 12/31	$	(2,295,000	)		$	(998,000	)
Balance Sheet
Current assets	$	343,000			$	432,000
Investment in Chandler		1,468,000				0
Trademarks		134,000				221,000
Patented technology		395,000				410,000
Equipment		693,000				341,000
Total assets	$	3,033,000			$	1,404,000
Liabilities	$	(203,000	)		$	(106,000	)
Common stock		(535,000	)			(300,000	)
Retained earnings, 12/31		(2,295,000	)			(998,000	)
Total liabilities and equity	$	(3,033,000	)		$	(1,404,000	)

Note: Parentheses indicate a credit balance.

a. Determine the following account balances:

Gain on bargain purchase.

Earnings from Chandler.

Investment in Chandler.

b. Prepare a December 31, 2018, consolidated worksheet for Brooks and Chandler.

Determine the following account balances.

	Consideration transferred $1,183,000 Chandler book value (given) $1,105,000 Equity earnings in Chandler 1,105,000 Gain on bargain purchase Equity earnings in Chandler Investment in Chandler 12/31/18

B.

Prepare a December 31, 2018, consolidated worksheet for Brooks and Chandler. (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.)

BROOKS AND CHANDLER Consolidation Worksheet For Year Ending December 31, 2018 Consolidation Entries Accounts Brooks Chandler Debit Credit Consolidated Totals Income Statement Revenues $(640,000) $(587,000) $1,227,000 Cost of goods sold 255,000 203,000 458,000 Gain on bargain purchase (126,000) 0 126,000 Depreciation and amortization 150,000 151,000 Equity earnings in Chandler (199,000) 0 Net income $(560,000) $(233,000) Statement of Retained Earnings Retained earnings, 1/1 $(1,835,000) $(805,000) Net income (560,000) (233,000) Dividends declared 100,000 40,000 Retained earnings, 12/31 $(2,295,000) $(998,000) Balance Sheet Current assets $343,000 $432,000 Investment in Chandler 1,468,000 0 Trademarks 134,000 221,000 Patented technology 395,000 410,000 Equipment 693,000 341,000 Total assets $3,033,000 $1,404,000 Liabilities $(203,000) $(106,000) Common stock (535,000) (300,000) Retained earnings, 12/31 (2,295,000) (998,000) Total liabilities and equity $(3,033,000) $(1,404,000)

Answer 1

Solution:

a.         Acquisition-date fair value allocation and annual excess amortization

            Consideration transferred ...................                                 $1,183,000

            Chandler book value (given) ...........          $1,105,000

            Technology undervaluation (6 yr. life)        204,000

            Acquisition-date fair value of net assets                               1,309,000

            Gain on bargain purchase.....................                                 $(126,000)

            Chandler net income..............................                                 $(233,000)

            Technology amortization.......................                                        34,000

            Equity earnings in Chandler.................                                 $(199,000)

            Fair value of net assets at acquisition-date                           $1,309,000

            Equity earnings from Chandler...........                                      199,000

            Dividends declared.................................                                    (40,000)

            Investment in Chandler 12/31/18..........                                 $1,468,000

Because a bargain purchase occurred, Chandler’s net asset fair value replaces the fair value of the consideration transferred as the initial value assigned to the subsidiary on the books of the parent, Brooks.

b.

Income Statement	Brooks	Chandler	Adj. &	Elim.	Consolidated
Revenues	(640,000)	(587,000)			(1,227,000)
Cost of goods sold	255,000	203,000			458,000
Gain on bargain purchase	(126,000)	-0-			(126,000)
Depreciation and amortization	150,000	151,000	(E)   34,000		335,000
Equity earnings in Chandler	(199,000)	-0-	(I) 199,000		-0-
Net income	(560,000)	(233,000)			(560,000)
Statement of Retained Earnings
Retained earnings, 1/1	(1,835,000)	(805,000)	(S) 805,000		(1,835,000)
Net income (above)	(560,000)	(233,000)			(560,000)
Dividends declared	100,000	40,000		(D)     40,000	100,000
Retained earnings, 12/31	(2,295,000)	(998,000)			(2,295,000)
Balance Sheet
Current assets	343,000	432,000			775,000
Investment in Chandler	1,468,000	-0-	(D) 40,000	(I)    199,000
				(S)1,105,000	-0-
				(A)   204,000
Trademarks	134,000	221,000			355,000
Patented technology	395,000	410,000	(A) 204,000	(E)     34,000	975,000
Equipment	693,000	341,000			1,034,000
Total assets	3,033,000	1,404,000			3,139,000
Liabilities	(203,000)	(106,000)			(309,000)
Common stock	(535,000)	(300,000)	(S) 300,000		(535,000)
Retained earnings, 12/31	(2,295,000)	(998,000)			(2,295,000)
Total liabilities and equity	(3,033,000)	(1,404,000)	1,582,000	1,582,000	(3,139,000)