Question

Patrick Corporation acquired 100 percent of O’Brien Company’s outstanding common stock on January 1, for $638,600 in cash. O’Brien reported net assets with a carrying amount of $422,000 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)	$	80,000	$	194,000
Customer relationships (5-year remaining life)		0		98,100
Equipment (10-year remaining life)		390,000		333,000

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	$	(1,552,500	)		$	(876,000	)
Cost of goods sold		414,000				406,000
Depreciation expense		91,200				75,000
Amortization expense		37,600				0
Income from O'Brien		(381,080	)			0
Net income	$	(1,390,780	)		$	(395,000	)
Retained earnings 1/1	$	(728,000	)		$	(326,000	)
Net income		(1,390,780	)			(395,000	)
Dividends declared		159,000				97,000
Retained earnings 12/31	$	(1,959,780	)		$	(624,000	)
Cash	$	233,000			$	138,500
Receivables		376,000				56,700
Inventory		253,000				160,000
Investment in O'Brien		926,680				0
Trademarks		564,000				78,900
Customer relationships		0				0
Equipment (net)		1,110,000				326,000
Goodwill		0				0
Total assets	$	3,462,680			$	760,100
Liabilities	$	(1,102,900	)		$	(36,100	)
Common stock		(400,000	)			(100,000	)
Retained earnings 12/31		(1,959,780	)			(624,000	)
Total liabilities and equity	$	(3,462,680	)		$	(760,100	)

1. Which investment method did Patrick use to compute the $381,080 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

page 1 Given data that Patrick Cogpogation acquisyed 100 peocent of o's Boein company past a $ 638,600 O' Bojien acquisition - date fais value O' Bojien book value $ 422,000 $ 216,600 Fais value in excess off book value

page 2 Allocation Amootization Tojade magjes Custome gjel- ation ships Life $ 114,000 indefinite $ 98,100 5 9916 $ 19,620 Equipment | Goodwill $ -5,700 $-54,000 10 yeye $ 61,500 Indefinite $ 216,600 Total $ 13,920 $ 395,000 100% of o boien Income Reposted Less: Amo qtization Net Income in patisick $ -13,920 $ 381,080

paolt B 1 Revenues $ 2,428,500 The Accounts of both companies combined cost of $ 820,000 goods sold The Accounts of both companies combined Depajeciati $ 160,500 The Accounts for both companies and the Acquisition selated - on Eupens de preciation Adjustment of $ 5400 Amogtiza muza $54,220 The Accounts of both companies and the Acquisition - gelated tion expense Ad justment of $ 19,620 Income of - The balance Reposted by the pagjent is gjemoued and applaced o' boien with subsidagiy's individual Bevenue and expense Account Net $ 1,390,780 Consolidated Revenues less Expenses. Income

paid Betained $ 428,000 only the pasyents Betained Eagnings figure is included Cagnings 111 Dividends $ 159,000 The subsidasy's dividents were paid to the pasjent and thus as an Inte company transfery je Eliminated Betained Easy $ 1,959,78 The begining balance for the pagjent plus consolidated net - ningh, 12/31 - income less consolidated [pagent] dividends Cash $371,500 The Accounts of both companies agje Added togethes Beceivables $ 432, 700 The Accounts of both companies asje combined Inventogy $413,000 The Accounts of both companies are combined Investment The pagents balance is ejemoved and replaced with the in o'brien | subsidiasiya Individual asset and diability Accounts

Teade maske $ 456,900 The Accounts of both companies are added togethes plus the 114,000 fais, value Adjustment Customery $18,480 The initial $ 98,100 faisy voleie Adjustment less $ 19,620 yelationships Amogitization Expense Equipment $ 1,384, 400 both company's balance less the $57,000 fais value Adjustment net of $5,700 in depriciation Expanse yeduction Goodwill $ 61,500 the original Allocation Total Assets $ 3,498,780 Summation of consolidated balances biabilities $1,139,000 The Accounts of both companies age combined Common $ 400,000 pagjents balance only Stock

page 6 Betained Eagin ingas 12131 $1,959, 980 computed Above Total Liabilities & Equities $ 3,498,780 Summation of consolidated balances

Debit Cojedit Accounts Pateiks | O'Bajien The Revenues $-1,552,500 $ - 846,000 cost of 900 $ 414,000 $ 406,000 - do sold Depojeciatio $ 911200 $ 45,000 -nexpense Consolidated $ -2,428,500 $ 820,000 $5,400 $ 160,500 $ 37,600 $ 19,620 Amootiza tion Expen $ 57,220 re $381,080 Income of $ -381,080 $345,000- I O' bien Net Income $-1,390,780 $ -395,000 Retained a Tearnings & $-428,000 $ -326,000 S $400,700 $5,700 $ -1,390,480 $326,000 $ - 428,000

Debit Cyedit Consolidated $-4390, 780 $97,000 $ 159,000 $ 94,000 $ - 1,959,480 D $326,000 Accounts Patsuick O'Bajien Net income (above) $1390,780 $ -395,000 Dividends paid $159,000 $ 97,000 Betained Easynings 12/31 $-1,959,760 $ -624,000 cabb $ 233,000 $ 138,500 Receivables $376,000 $ 56,700 Invento914 $ 253,000 $160,000 Investment in O' Bojien $ 926,680 $ 341,500 $ 432,700 $94,000 S $ 413,000 $426,000 $ - $216,600 $ 381,080 A A Teade maske customes gelation ships $ 564,000 $ +8,900 $- $. $114,000 $ 98,100 $ 756,900 $ 19,620 $ 48,480 A E

- Debit $5,-400 $61,500 A Accounts Patoliek O'Brien | Equipment (net) $1,110,000 $326,000 Goodwill A Total Assets $ 3,462,680 $760,100 Diabilities $ -1,102,900 $-36,100 Common stock -400,000 $ - 100,000 S Retained eagnin $-1,959,78 $ -624,000 9. (above) Total liabilites and S-3,462, $ - 460,400 680 Equality Cojedit Consolidated $57,000 $1,384,100 $ 61,500 $ 3,498,480 $ -1,139,000 $ - 400,000 $100,000 $ -1,959,780 $ -3,498,780