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

Answer :

Calculation of overvalue and unervalued assets

	Book values	Fair values	Difference
	[A]	[B]	[B -A]
Trademark	102,000	299,000	197,000
Customer relationships	-	96,600	96,600
Equipment	359,000	329,000	(30,000)
Calculation of Goodwill on acquisition if any
Acquisition price paid by Patrick	796,500
Book value of O'Brien	(448,000)
Excess of fair value over book value	348,500
Allocation of excess value to specified assets :
	Initial value	Life	Amortization per year
	[A]	[B]	[A/B]
Trademarks	197,000	-	-
Customer relationships	96,600	5	19,320
Equipment	(30,000)	10	(3,000)
	263,600		16,320
Goodwill (348,500 - 263,600)	84,900	-	-
Total	348,500		16,320

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

Patrick corporation and consolidated subsidiary O'Brien Consolidated worksheet For year ending December 31
			Consolidation Entries				Consolidated
Accounts	Patrick	O'Brien		Debit	Credit		Totals
Revenues	(1,815,000)	(856,000)					(2,671,000)
Cost of goods sold	484,000	396,000					880,000
Depreciation expense	104,100	95,400			3,000	[E]	196,500
Amortization	28,200	-	[E]	19,320			47,520
Income from O'Brien	(348,280)	-	[I]	348,280			-
Net income	(1,546,980)	(364,600)					(1,546,980)
Retained earnings 1/1	(764,000)	(312,000)	[S]	312,000			(764,000)
Net income (above)	(1,546,980)	(364,600)					(1,546,980)
Dividends declared	154,000	92,000			92,000	[D]	154,000
Retained earnings 12/31	(2,156,980)	(584,600)					(2.156,980)
Cash	238,000	121,000					359,000
Receivables	322,000	68,400					390,400
Inventory	202,000	168,000					370,000
income from O'Brien	1,016,780	-	[D]	92,000	1,108,780	[I+A+S]	-
Trademarks	518,000	79,800	[A]	197,000			794,800
Customer relationships	-	-	[A]	96,600	19,320	[E]	77,280
Equipment [net]	944,000	276,000	[E]	3,000	30,000	[A]	1,193,000
Goodwill	-	-	[A]	84,900			84,900
Total Assets	3,240,780	713,200					3,269,380
Liabilities	(683,800)	(28,600)					(712,400)
Common stock	(400,000)	(100,000)	[S]	100,000			(400,000)
Retained earnings (above)	(2,156,980)	(584,600)		-	-		(2,156,980)
Total liabilities and equity	(3,240,780)	(713,200)		1,253,100	1,253,100		(3,269,380)

Entries Explanation

[I] is to eliminate the inter company income

[D] is to eliminate the inter company 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 acquisition

[E] is to record the amortization and depreciation expenses on excess / short value

Consolidation entry of investment in O'Brien

	Amount
Entry I
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