Question

15. Haynes, Inc., obtained 100 percent of Turner Company's common stock on January 1, 2017, by issu- ing 9,000 shares of $10 par value common stock. Haynes's shares had a $15 per share fair value. On that date, Turner reported a net book value of $100,000. However, its equipment (with a five-year remaining life) was undervalued by $5,000 in the company's accounting records. Also, Turner had developed a customer list with an assessed value of $30,000, although no value had been recorded on Turner's books. The customer list had an estimated remaining useful life of 10 years. The following balances come from the individual accounting records of these two companies as of December 31, 2017: Turner Revenues Expenses Investment income Dividends declared Haynes $(600,000) 440,000 Not given 80,000 $(230,000) 120,000 -0- 50,000 The following balances come from the individual accounting records of these two companies as of December 31, 2018: Haynes Turner Revenues Expenses Investment income Dividends declared Equipment $(700,000) 460,000 Not given 90,000 500,000 $(280,000) 150,000 -O- 40,000 300,000 a. What balance does Haynes's Investment in Turner account show on December 31, 2018, when the equity method is applied? b. What is the consolidated net income for the year ending December 31, 2018? c. What is the consolidated equipment balance as of December 31, 2018? How would this answer be affected by the investment method applied by the parent?

Answer 1

a.

The allocation of acquisition price based on the fair value of shares issued must be made first.

Fair value of acquisition (paid by Haynes)	$ 135,000
Book value	(100,000)
Excess of turner fair value over book value	$ 35,000

Excess fair value will be assigned to remaining annual excess accounts based on life amortizations

	Value	Remaining life	Amortized value
Equipment	5000	5	$ 1,000
Customer List	30,000	10	$ 3,000
		Total	$ 4,000

Acquisition Date- Fair value	$ 135,000
2017 Accrual Income	110,000
2017 Dividends declared by Turner	(50,000)
2017 amortization as computed above	(4,000)
2018 Income accrual	130,000
2018 Dividends declared by Turner	(40,000)
2018 Amortization same as 2017	(4,000)
Investment in Turner account balance	$ 277,000

b.

Net income of Haynes	$ 240,000
Add: Net income of Turner	130,000
Less: amortization expense	(3,000)
Depreciation expense	(1,000)
Consolidated net income for 2018	$ 366,000

c.

Equipment Balance Haynes	$ 500,000
Equipment Balance Turner	300,000
Allocation to be based on fair value	5,000
Depreciation for 2017 and 2018	(2,000)
Consolidated equipment balance on 31st Dec, 2018	$ 803,000

The parent company choice of investment does not have impact on consolidated totals

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