Question

Patrick Corporation acquired 100 percent of O'Brien Company's outstanding common stock on January 1, for $550,000 in cash. O'Brien reported net assets with a carrying amount of $350,000 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 $ 60,000 Trademarks (indefinite life) ...... Customer relationships (5-year remaining life) ... Equipment (10-year remaining life) ... Fair Values $160,000 75,000 312,000 342.000 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 (1.125,000) 300,000 75,000 25,000 (210,000) 1935,000) O'Brien 520.000) 228.000 70,000 Revenues... Cost of goods sold Depreciation expense.... Amortization expense ...... Income from O'Brien ...... Not Income... . Retained earnings 1/1 Net Income.. Dividends declared.......... Retained earnings 12/31..... 222.000) (250.000) (222.000) 80,000 (392,000) 105,000 56.000 135.000 $ (700,000) (935,000) 142.000 (1.493,000 185.000 225,000 175,000 680,000 474,000 $ 60,000 Cash. Receivables... Inventory.... .. Investment in O'Brien.... Trademarks ... . Customer relationships... Equipment (net)..... Goodwill Total assets.. Liabilities.... Common stock Retained earnings 12/31.... Total liabilities and equity... 272.000 925,000 -0- 2,664,000 (171.000 (400,000) (1,493,000 2.664,000 628,000 (136.000) (100,000) 392.000 628.000 $ a. Show how Patrick computed the $210,000 Income of O'Brien balance. Discuss how you determined which accounting method Patrick uses for its investment in O'Brien b. Without preparing a worksheet or consolidation entries, determine and explain the totals to be reported for this business combination for the year ending December 31 c. 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

Please hit LIKE button if this helped. For any further explanation, please put your query in comment, will get back to you. Part a $ $ Amortization O'Brien acquisition-date fair value O'Brien book value Fair value in excess of book value Allocation: Trademarks Customer relationships Equipment Goodwill Total 550,000 350,000 200,000 Life 100,000 indefinite 75,000 5 yrs. -30,000 10 yrs. 55,000 indefinite 200,000 $ $ 15,000 -3,000 $ 12,000 100% of O'Brien Income Reported Less: Amortization Net Income in Pattrick $ $ $ 222,000 -12,000 210,000 Above calculation is made in EQUITY METHOD. Part b Revenues Cost of Goods Sold Depreciation Expense Amortization Expense Income of O'Brien Net Income Retained Earnings, 1/1 Dividends Paid Retained Earnings, 12/31 Cash Receivables Inventory Investment in O'Brien Trademarks Customer relationships Equipment Goodwill Total Assets Liabilities Common Stock Retained Earnings, 12/31 Total Liabilities and Equities $ 1,645,000 the accounts of both companies combined $ 528,000 the accounts of both companies combined $ 142,000 the accounts for both companies and the acquisition-related depreciation adjustment of $3,000 $ 40,000 the accounts of both companies and the acquisition-related adjustment of $15,000 $ - the balance reported by the parent is removed and replaced with the subsidiary's individual revenue and expen $ 935,000 consolidated revenues less expenses $ 700,000 only the parent's retained earnings figure is included $ 142,000 the subsidiary's dividends were paid to the parent and, thus, as an intercompany transfer are eliminated $ 1,493,000 the beginning balance for the parent plus consolidated net income less consolidated [parent] dividends $ 290,000 the accounts of both companies are added together $ 281,000 the accounts of both companies are combined $ 310,000 the accounts of both companies are combined $ - the parent's balance is removed and replaced with the subsidiary's individual asset and liability accounts $ 634,000 the accounts of both companies are added together plus the 100,000 fair value adjustment $ 60,000 the initial $75,000 fair value adjustment less $15,000 amortization expense $ 1,170,000 both company's balances less the $30,000 fair value adjustment net of $3,000 in depreciation expense reduction $ 55,000 the original allocation $ 2,800,000 summation of consolidated balances $ 907,000 the accounts of both companies are combined $ 400,000 parent balance only $ 1,493,000 computed above $ 2,800,000 summation of consolidated balances

Partc Debit Credit Consolidated $ -1,645,000 $ 528,000 3,000 $ 142,000 $ 40,000 $ E Accounts Revenues Cost of goods sold Depreciation expense Amortization expense Income of O'Brien Net income Retained earnings, 1/1 Net income (above) Dividends paid Retained earnings, 12/31 Cash Receivables Inventory Investment in O'Brien Patrick O'Brien $ -1,125,000 $ 520,000 $ 300,000 $ 228,000 $ 75,000 $ 70,000 $ 25,000 $ - $ 210,000 $ $ -935,000$ -222,000 $ -700,000 $ -250,000 $ -935,000 $ -222,000 $ 142,000 $ 80,000 $ -1,493,000 $ -392,000 $ 185,000 $ 105,000 $ 225,000 $ 56,000 $ 175,000 $ 135,000 $ 680,000 $ 15,000 $ 210,000 $ 225,000 $ 250,000 S $ 250,000 $ 80,000 S $ 3,000 $ -935,000 $ -700,000 $ -935,000 $ 80,000 $ 142,000 $ 80,000 $ -1,493,000 $ 290,000 $ 281,000 $ 310,000 $ 350,000 $ $ 200,000 $ 210,000 $ 634,000 $ 15,000 $ 60,000 $ 30,000 $ 1,170,000 $ 55,000 $ 2,800,000 $ -907,000 $ -400,000 $ $ $ Trademarks Customer relationships Equipment (net) Goodwill Total assets Liabilities Common stock 474,000 $ - $ 925,000 $ - $ 2,664,000 $ -771,000 $ -400,000 $ 60,000 A - A 272,000 E - A 628,000 -136,000 -100,000 S $ 100,000 $ 75,000 E $ 3,000 A $ 55,000 $ $ $ $ 100,000 Retained earnings (above) Total liabilities and equity $ -1,493,000 $ $ -2,664,000 $ -392,000 -628,000 $ -1,493,000 $ -2,800,000