Question

Patrick Corporation acquired 100 percent of O’Brien Company’s outstanding common stock on January 1, for $796,500 in cash. O’Brien reported net assets with a carrying amount of $448,000 at that time. Some of O’Brien’s assets either were unrecorded (having been internally developed) or had fair values that differed from book values as follows:

	Book Values		Fair Values
Trademarks (indefinite life)	$	102,000	$	299,000
Customer relationships (5-year remaining life)		0		96,600
Equipment (10-year remaining life)		359,000		329,000

Any goodwill is considered to have an indefinite life with no impairment charges during the year.

Following are financial statements at the end of the first year for these two companies prepared from their separately maintained accounting systems. O’Brien declared and paid dividends in the same period. Credit balances are indicated by parentheses.

	Patrick				O'Brien
Revenues	$	(1,815,000	)		$	(856,000	)
Cost of goods sold		484,000				396,000
Depreciation expense		104,100				95,400
Amortization expense		28,200				0
Income from O'Brien		(348,280	)			0
Net income	$	(1,546,980	)		$	(364,600	)
Retained earnings 1/1	$	(764,000	)		$	(312,000	)
Net income		(1,546,980	)			(364,600	)
Dividends declared		154,000				92,000
Retained earnings 12/31	$	(2,156,980	)		$	(584,600	)
Cash	$	238,000			$	121,000
Receivables		322,000				68,400
Inventory		202,000				168,000
Investment in O'Brien		1,016,780				0
Trademarks		518,000				79,800
Customer relationships		0				0
Equipment (net)		944,000				276,000
Goodwill		0				0
Total assets	$	3,240,780			$	713,200
Liabilities	$	(683,800	)		$	(28,600	)
Common stock		(400,000	)			(100,000	)
Retained earnings 12/31		(2,156,980	)			(584,600	)
Total liabilities and equity	$	(3,240,780	)		$	(713,200	)

1. Which investment method did Patrick use to compute the $348,280 income from O'Brien?

2. Determine the totals to be reported for this business combination for the year ending December 31.

3. Verify the totals determined in part (b) by producing a consolidation worksheet for Patrick and O’Brien for the year ending December 31.

Answer 1

Calculation of Overvalued and Undervalued Assets Book Values [A] Trademarks 102,000 Customer relationships Equipment 359,000 Fair Values [B] 299,000 96,600 329,000 Difference [B-A] 197,000 96,600 (30,000) Calculation of goodwill on acquisition if any Acquistion price paid by patrick Book value of O'Brien Excess of fair value over book value 796,500 (448,000) 348,500 Allocation of excess value to specified assets: Life Amortization per year [A/B] [B] Trademarks Customer relationships Equipment Initial Value TAL 197,000 96,600 (30,000) 263,600 84,900 348,500 10 19,320 (3,000) 16,320 Goodwill (348,500 - 263,600) Total 16,320

Investment method is Equity Method Reason Net Income of O'Brien 364,600 Less: Amortization expenses (16,320) Adjusted Net Income of O'Brien 348,280 Income from O'Brien 348,280 As the Income from O'Brien is equal to adjusted net income of O'Brien that's why company follows the equity method

b. (2,671,000) 880,000 47,520 196,500 Revenues Cost of goods sold Amortization expense Depreciation expense Income from O'Brien Net Income Retained Earnings 1/1 Dividends declared Retained Earnings 12/31 Cash Receivables Inventory Income from O'Brien Trademarks Customer relationships Equipment (net) Goodwill Total Assets Liabilities Common stock Retained Earnings 12/31 Total Liabilities and equity (1,546,980) (764,000) 154,000 (2,156,980) 359,000 390,400 370,000 794,800 77,280 1,193,000 84,900 3,269,380 (712,400) (400,000) (2,156,980) (3,269,380)

Accounts Revenues Cost of goods sold Depreciation expense Amortization expense Income from O'Brien Net Income PATRICK CORPORATION AND CONSOLIDATED SUBSIDIARY O'BRIEN Consolidated Worksheet For Year Ending December 31 Consolidation Entries Patrick O'Brien Debit Credit (1,815,000) (856,000) 484,000 396,000 104,100 95,400 3,000 28,200 - [E] 19,320 (348,280) - [0] L 348,280 (1,546,980) (364,600) Consolidated Totals (2,671,000) 880,000 196,500 47,520 [E] (1,546,980) 312,000 Retained Earnings 1/1 Net Income (above) Dividends declared Retained Earnings 12/31 (764,000) (1,546,980) 154,000 (2,156,980) (312,000) [S] (364,600) 92,000 (584,600) (764,000) (1,546,980) 154,000 (2,156,980) 92,000 [D] 238,000 322,000 202,000 1,016,780 518,000 359,000 390,400 370,000 1,108,780 Cash Receivables Inventory Income from O'Brien Trademarks Customer relationships Equipment (net) Goodwill Total Assets [I+A+S] 121,000 68,400 168,000 - 79,800 - 276,000 - [D] [A] [A] [E] [A] 92,000 197,000 96,600 3,000 84,900 19,320 30,000 [E] [A] 944,000 794,800 77,280 1,193,000 84,900 3,269,380 3,240,780 713,200

100,000 Liabilities Common stock Retained Earnings (above) Total Liabilities and equity (683,800) (400,000) (2,156,980) (3,240,780) (28,600) (100,000) [S] (584,600) (713,200) (712,400) (400,000) (2,156,980) (3,269,380) 1,253,100 1,253,100 Entries Explanation [U] is to eliminate the intercompany income [D] is to eliminate the intercompany dividend [S] is to eliminate the stockholders equity of the subsidiary [A] is to record the difference of market value and fair value at the at the acquisition [E] Is to record the amortization and depreciation expenses on excess / short value Consolidated Entry of Investment in O'Brien Amount Entry Income from O'Brien 348,280 Entry S(Subsidiary Equity Holding) Common Stock 100,000 Beginning Retained Earnings 312,000 Entry A (to record excess value) Trademarks 197,000 Customer relationships 96,600 Equipment (30,000) Goodwill 84,900 1,108,780