Question

Consolidated Statement of Cash Flows Puesto Products purchased 80 percent of the outstanding common shares of Schicken Foods on January 1, 20x1. The balance sheets for both companies as of December 31, 20x0 (i.e., immediately prior to the acquisition) are displayed in Exhibit 1. Details of the acquisition are as follows: • • Puesto paid $40,000 in cash plus common stock valued at $120,000 to the selling shareholders of Schicken. The fair value of the non-controlling interest is estimated to be $30,000. The fair values of the assets acquired and liabilities assumed of Schicken approximated their book values, except for buildings and equipment, whose fair value is $20,000 higher than book value. The remaining estimated life of the buildings and equipment is 10 years. Financial statements of Puesto and Schicken on December 31, 20x1 are displayed in Exhibit 2. Additional information regarding events taking place during the year are as follows: • • Puesto sold land it had purchased in 20x0 for $40,000 to a non-affiliate for $70,000. Schicken purchased additional equipment during 20x1 from a non-affiliate for $100,000. Puesto acquired a 25% interest in Inviare Corporation at a cost of 50,000, which equaled 25% of the book value of Inviare's net assets. During the year, Inviare reported net income of $16,000 and paid dividends of $10,000. Required 1. Calculate the amount of goodwill to be recognized on the acquisition date. 2. Calculate the amount of the purchase price that would be considered a control premium. 3. Allocate the goodwill between Puesto and the non-controlling interests 4. Prepare consolidated statements of income, retained earnings and financial position for 20x1. 5. Prepare a consolidated statement of cash flows for 20x1 using the indirect method.

Answer 1

Answers :

(1) Calculation of amount of goodwill to be recognized on that of acquisition

Cost of Acquisition of a shares in Schicken Ltd                                   $160,000 ($120,000 + $40,000)

Less : Fair value of Equity of Schicken Ltd on date of Acquisition          $120,000

          [(220,000+20,000) - 40,000 - 80,000]   

Goodwill = $ 40,000

(2) Price that would be considered a control premium

    Consideration paid for acquisition (Both in cash and shares)         $ 160,000

    Less : Paid up value of shares acquired                                      $ 120,000

             Control Premium paid                                                   = $ 40,000

(3) Allocation of Goodwill between Puesto and Non- controlling entities

     Total Goodwill recognized                                                         $ 40,000

     Share of Puesto @ 80%                                                           $32,000

     Share of non-controlling entities @ 20%                                     $ 8,000

(4) Consolidated Income Statement of Puesto ltd and its subsidiary Schicken Ltd for the year ending on December 31, 20x1

     Particulars                                                                                                                                Amount ($)

    Net Income of Puesto as per income statement 492,400

     Less : Dividends Paid by Puesto                                                                                               -140,000

     Add : Dividend received from Schicken ($100,000 * 80%)                                                              80,000

                            Net income of Puesto                                                                                         432,400

     Add: Net Income of Schicken Ltd as per income statement                $ 200,000

Less : Dividend Paid $ 100,000

                                                                                                           $ 100,000

                       80% thereof                                                                                                            80,000

Total Net Income of the Group (Consolidated) 512,400

              Consolidated Retained Earnings of the group is $ 532,400

Consolidated Balance Sheet of Puesto And its subsidiary Schicken Ltd as on December 31, 20x1

    (I)   Equity and Liabilities                                                                           Amount ($)

(1) Shareholder's Fund                                                         

(a) Share Capital    320,000

(b) Reserves & Surplus                                                                                 572,400

(2) Minority Interest                                                                                       40,000

(3) Non-Current Liabilities

- Long-term Debt                                                                                       450,000

(4) Current Liabilities

- Accounts payable                                                                                    152,000

     TOTAL

     (II) Assets

(1) Non-Current Assets

     Fixed Assets

(i) Tangibles (Land, Buildings And Equipment)                                            665,000

      Non- Current Investments

   -   Investment in Associate Inviare Corporation                                             51,500

(2) Current Assets

      Inventory                                                                                               100,000

      Accounts receivable                                                                                80,000

      Cash                                                                                                     519,500

TOTAL                                                                                                        1,416,000