Question

Parent Corporation acquired 100% of Sub Co. on January 1, Year 1 by issuing 25,000 shares of $1 par common stock (fair value $25 per share). Sub reported retained earnings of $350,000 and total stockholders' equity of $480,000 at that time. On that date, Sub had royalty agreements (6-year life) that were undervalued on its books by $60,000. In addition, Sub owned a copyright (10-year life) that was not reflected on its books that had a fair value of $50,000. Any goodwill is considered to have an indefinite life with no impairment charges on the date of consolidation. Required: Complete the following worksheet to compute consolidated balances as of December 31, Year 5 Worksheet Entries Debit Credit Consolidated Totals $ $ P Books 610,000 385,000 135,000 360,000 Books 370,000 220,000 Revenues Expenses Investment Income Net Income $ $ 150,000 $ $ RE, 1/1 Net Income Dividends RE 12/31 1,235,000 360,000 90,000 1,505,000 610,000 150,000 5,000 755,000 $ $ $ $ 515,000 Current Assets Investment in Sub 1,050,000 955,000 400,000 Copyrights Royalty Agreements 460,000 920,000 440,000 Total Assets $ 3,385,000 $ 1,355,000 $ Liabilities Common Stock Add'l Pd-In Capital RE 12/31 Total Liab & SE $ 780,000 800,000 300,000 1,505,000 $ 3,385,000 470,000 100,000 30,000 755,000 1,355,000 $

Answer 1

625,000 (480,000) 145,000 Fair Value Analysis Acquistion price paid (25,000 shares * $ 25) Less: Stockholders equity sub Excess of Fair value over book value Less: Undervalued assets Royalty Agreement Copyright Goodwill (60,000) (50,000) 35,000 Calculation of Amortization on assets undervalued at the time of acquisition Assets Value as on Year 1 Life (A) (B) Royalty Agreement $ 60,000 Copyright 50,000 Goodwill 35,000 6 10 . Amortization per year (A/B) $ 10,000 $ 5,000 $ Value of Undervalued assets at the beginning Year 5 Accumulated Value at the Assets Value as on Year 1 Amortization Amortization beginning of Year 5 (A) (B) |(C = B x 4 year) (A-C) Royalty Agreement $ 60,000 $ 10,000 $ 40,000 $ 20,000 Copyright 50,000 $ 5,000 $ 20,000 $ 30,000 Goodwill 35,000 $ - $ - $ 35,000

Worksheet Entries Debit Credit P Books 610,000 385,000 135,000 360,000 S Books 370,000 220,000 (e) Consolidated Totals 980,000 620,000 Revenues Expenses Investment Income Net Income 15,000 135,000 (0) 150,000 360,000 (s) 610,000 RE,1/1 Net Income Dividends RE, 12/31 1,235,000 360,000 90,000 1,505,000 610,000 150,000 5,000 755,000 1,235,000 360,000 90,000 1,505,000 5,000 (d) 1,565,000 Current Assets Investment in Sub. 1,050,000 955,000| 515,000 - |(d) 5,000 | 740,000 (s) | 85,000 (a) 135,000 (0) 5,000 (e) 10,000 (e) 460,000 920,000 Copyrights Royalty Agreements Goodwill Total Assets 400,000 (a) 440,000 (a) - (a) 1,355,000 30,000 20,000 35,000 885,000 1,370,000 35,000 3,855,000 3,385,000 Liabilities Common stock Add'l Pd-In Capital RE 12/31 Total Liab & SE 780,000 800,000 300,000 1,505,000 3,385,000 470,000 100,000 (s) 30,000 (s) 755,000 1,355,000 100,000 30,000 1,250,000 800,000 300,000 1,505,000 3,855,000 980,000 980,000 Entry (s) to eliminate subsidiary stockholders' equity Entry (a) to record the unamortized undervalued assets value Entry (i) to eliminate the investment income Entry (d) to eliminate the dividend declared by sub. Entry (e) to record the amortization expenses