Question

The Holtz Corporation acquired 80 percent of the 100,000 outstanding voting shares of Devine, Inc., for $6.90 per share on January 1, 2017. The remaining 20 percent of Devine’s shares also traded actively at $6.90 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 future life was undervalued by $52,500 and a fully amortized trademark with an estimated 10-year remaining life had a $71,000 fair value. At the acquisition date, Devine reported common stock of $100,000 and a retained earnings balance of $249,500.

Following are the separate financial statements for the year ending December 31, 2018:

	Holtz Corporation				Devine, Inc.
Sales	$	(837,000	)		$	(394,500	)
Cost of goods sold		292,000				154,000
Operating expenses		324,000				79,500
Dividend income		(16,000	)			0
Net income	$	(237,000	)		$	(161,000	)
Retained earnings, 1/1/18	$	(767,000	)		$	(319,500	)
Net income (above)		(237,000	)			(161,000	)
Dividends declared		80,000				20,000
Retained earnings, 12/31/18	$	(924,000	)		$	(460,500	)
Current assets	$	323,500			$	253,500
Investment in Devine, Inc		552,000				0
Buildings and equipment (net)		857,500				408,000
Trademarks		151,000				195,000
Total assets	$	1,884,000			$	856,500
Liabilities	$	(640,000	)		$	(296,000	)
Common stock		(320,000	)			(100,000	)
Retained earnings, 12/31/18 (above)		(924,000	)			(460,500	)
Total liabilities and equities	$	(1,884,000	)		$	(856,500	)

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

1. Prepare a worksheet to consolidate these two companies as of December 31, 2018.

2. Prepare a 2018 consolidated income statement for Holtz and Devine.

3. If instead the noncontrolling interest shares of Devine had traded for $4.73 surrounding Holtz’s acquisition date, what is the impact on goodwill?
   HOLTZ CORPORATION AND DEVINE, INC. Consolidation Worksheet For Year Ending December 31, 2018 Holtz Devine Consolidation Entries Corporation Inc. Debit Credit Accounts Noncontrolling Interest consolidated Totals Sales $ (837,000) Cost of goods sold Operating expenses Dividend income 292,000 324,000 (16,000) $ (237,000) (394,500) 154,000 79,500 0 $ (1,231,500) 446,000 421,100 0 17,600 16,000 Separate company net income 161,000) S Consolidated net income NI attributable to noncontrolling interest NI attributable to Holtz Corp. (35,720) (364,400) 35,720 (328,680) $ Retained earnings, 1/1 319,500 41,920 Net income Dividends declared $ (767,000) (237,000) 80,000 $ (924,000) (319,500) (161,000) 20,000 0 4,000 $ (808,920) (328,680) 80,000 $ (1,057,600) Retained earnings, 12/31 (460,500) $ $ Current assets Investment in Devine 323,500 552,000 $ 253,500 0 577,000 0 41,920 593,920
   

Answer 1

552,000 138,000 690,000 Calculation of Goodwill on the date of acquisition as on 1/1/2017 Fair value transfer by Holtz Corporation for 80% share (100,000 Shares x 80% x 6.90) Fair value of Non Controlling Interest (100,000 shares x 20% x 6.90) Total Fair Value of Devine ltd Less: Book Value Common Stock Retained Earnings 1/1/17 Excess of Fair value over book Value Allocation of Excess Fair value to: Building Trademark Goodwill (340,500 - 52,500 - 71,000) 100,000 249,500 340,500 52,500 71,000 217,000 Amortization and Carrying Value of Excess fair value of Assets Assets Value as on 1/1/2017 (A) life in years (B) Amortization per year C = (A/B) 10,500 7,100 Building Trademark Goodwill Total 10 Value as on 1/1/2018 D = (A-C) 42,000 63,900 217,000 322,900 52,500 71,000 217,000 340,500 17,600

HOLTZ CORPORATION AND DIVINE INC. Consolidated Worksheet For the year Ending December 31, 2018 Consolidation Accounts Holtz Corporation Divine Inc Debit Credit Non Controlling Interest (837,000) 292,000 324,000 (16,000) (237,000) Consolidated Totals (1,231,500) 446,000 421,100 Sales Cost of goods sold Operating expenses Dividend Income Separate Company Net income Consolidated Net Income NI attributable to Controlling Interest NI attributable to Holtz Corp. (394,500) 154,000 79,500 [D] - [C] (161,000) 17,600 16,000 L L L (28,680) (364,400) 28,680 (335,720) 319,500 41,920 [ADJ] Retained Earnings 1/1 Net Income Dividends Declared Retained Earnings 12/31 (767,000) (237,000) 80,000 (924,000) (319,500) [E] (161,000) 20,000 (460,500) (808,920) (335,720) 80,000 (1,064,640) 16,000 [C] 4,000 577,000 Current Assets Investment in Divine Building and equipments, net Trademarks Goodwill Total Assets 323,500 552,000 857,500 151,000 253,500 - (ADJ) 408,000 [A] 195,000 [A] - [A] 856,500 41,920 42,000 63,900 217,000 593,920 10,500 7,100 [E + A) x 80% [D] [D] 1,297,000 402,800 217,000 2,493,800 1,884,000

(640,000) (320,000) (924,000) (296,000) (100,000) [E] (460,500) 100,000 (936,000) (320,000) (1,064,640) Liabilities Common stock Retained Earnings 12/31 NCI in Divine, 1/1 NCI in Divine, 12/31 Total liabilites and equity 148,480 [E + A] x 20% (148,480) (173,160) (173,160) (2,493,800) (1,884,000) (856,500) 817,920 817,920 Working Notes (Adj. JAdjustment for Conversion from Intial method to equity Method Change in Retained earnings of Divine from 1/1/2017 to 01/01/18 = (319,500 - 249,500) Less: Excess Amortization Adjusted increase in Retained Earnings of Divine Ltd Holtz share 80% ( 52,400 x 80%) 70,000 17,600 52,400 41,920 Net Income attributable to Non Controlling Interest Net Income of Divine Less: Excess Amortization Adjusted Net Income of Divine Non Controlling Share 20% (143,400 x 20%) 161,000 17,600 143,400 28,680

Entries Explanation [C] It is to eliminate the intra entity dividend declared by the subsidiary and recorded as income by parent [E] it is to eliminate the stockholders' equity account of subsidiary while recognizing the Non controlling interest at the beginning of the year Non Controlling Shares: [(Common Stock + Retained Earnigns 01/01/18) > 20%] Investment in Devine : [(Common Stock + Retained Earnigns 01/01/18) > 80%] [A] it is to record the unamortized fair value of assets as on 01/01/18 acquired on 01/01/2017 [D] it is to record the amortization expenses during the year [Adj') it is convert the Holtz retained earnings balance by converting from intial value method to equity method Total Noncontrolling Interest 01/01/18 20% 100% Adjusted Credit Balance after combining multiple Entries Investment In Holtz 80% Entry [E] Common stock 80,000 Retained Earnings 01/01/18 255,600 Entry [A] Building and equipments, net 33,600 Trademark 51,120 Goodwill 173,600 Total 593,920 20,000 63,900 100,000 319,500 8,400 12,780 43,400 148,480 42,000 63,900 217,000 742,400

HOLTZ CORPORATION AND DIVINE INC Consolidated Income statement For year Ending December 31, 2018 1,231,500 446,000 421,100 Sales Cost of goods sold Operating Expenses Total expenses Consolidated Net Income To non controlling interest To Holtz corporation 867,100 364,400 28,680 335,720 552,000 94,600 646,600 C) if Non controlling interest shares of Devine had traded for $4.73 per share Fair value transfer by Holtz Corporation for 80% share (100,000 Shares x 80% x 6.90) Fair value of Non Controlling Interest (100,000 > 20% x 4.73) Total Fair Value of Devine ltd Less: Book Value Common Stock Retained Earnings 1/1/17 Excess of Fair value over book Value Allocation of Excess Fair value to: Building Trademark Goodwill (297,100 - 52,500 -71,000) 100,000 249,500 297,100 52,500 71,000 173,600 Impact on Goodwill Goodwill decrease to 173,600