Question

Patrick Corporation acquired 100 percent of O'Brien Company's outstanding common stock on January 1, for $598,100 in cash. O'Brien reported net assets with a carrying amount of $358,000 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: Trademarks (indefinite life) Customer relationships (5-year remaining life) Equipment (10-year remaining life) Book Values $ 100,500 0 436,000 Fair Values $ 230,500 86,100 401,500 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 $(1,327,500) 354,000 99,300 32,000 (198,830) $(1,041,030) O'Brien $ (528,000) 232,000 83,400 $ (212,600) $ (838,000) (1,041,030) 164,000 $(1,715,030) $ (281,000) (212,600) 102,000 $ (391,600) $ Revenues Cost of goods sold Depreciation expense Amortization expense Income from O'Brien Net income Retained earnings 1/1 Net income Dividends declared Retained earnings 12/31 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 220,000 378,000 177,000 717,930 666,000 147,500 85,200 202,000 88,500 1,100,000 296,000 $ 819,200 $ 3,258,930 $ (1,143,900) (400,000) (1,715,030) $ (3, 258,930) $ (327,600) (100,000) (391,600) $ (819, 200) a. Which investment method did Patrick use to compute the $198,830 income from O'Brien? b. Determine 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

Answer 1

Calculation of Overvalued and Undervalued Assets Book Values [A] Trademarks 100,500 Customer relationships Equipment 436,000 Fair Values [B] 230,500 86,100 401,500 Difference [B-A] 130,000 86,100 (34,500) Calculation of goodwill on acquisition if any Acquistion price paid by patrick Book value of O'Brien Excess of fair value over book value 598,100 (358,000) 240,100 Allocation of excess value to specified assets: Life [B] Amortization per year (A/B] - Trademarks Customer relationships Equipment Initial Value [A] 130,000 86,100 (34,500) 181,600 58,500 240,100 10 17,220 (3,450) 13,770 Goodwill (240,100 - 181,600) Total 13,770 a. Investment method is Equity Method Reason Net Income of O'Brien 212,600 Less: Amortization expenses (13,770) Adjusted Net Income of O'Brien 198,830 Income from O'Brien 198,830 As the Income from O'Brien is equal to adjusted net income of O'Brien that's why company follows the equity method

(1,855,500) 586,000 49,220 179,250 b. Revenues Cost of goods sold Amortization expense Depreciation expense Income from O'Brien Net Income Retained Earnings 1/1 Dividends declared Retained Earnings 12/31 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 (1,041,030) (838,000) 164,000 (1,715,030) 367,500 463,200 379,000 884,500 68,880 1,364,950 58,500 3,586,530 (1,471,500) (400,000) (1,715,030) (3,586,530)

Accounts Revenues Cost of goods sold Depreciation expense Amortization expense Income from O'Brien Net Income PATRICK CORPORATION AND CONSOLIDATED SUBSIDIARY O'BRIEN Consolidated Worksheet For Year Ending December 31 Consolidation Entries Patrick O'Brien Debit Credit (1,327,500) (528,000) 354,000 232,000 L T 99,300 83,400 3,450 32,000 - [E] 17,220 (198,830) - 0 198,830 (1,041,030) (212,600) Consolidated Totals (1,855,500) 586,000 179,250 49,220 [E] (1,041,030) 281,000 Retained Earnings 1/1 Net Income (above) Dividends declared Retained Earnings 12/31 (838,000) (1,041,030) 164,000 (1,715,030) (281,000) [S] (212,600) 102,000 (391,600) (838,000) (1,041,030) 164,000 (1,715,030) 102,000 [D] Cash 220,000 378,000 177,000 717,930 666,000 147,500 85,200 202,000 367,500 463,200 379,000 819,930 [1+A+S] 88,500 Receivables Inventory Income from O'Brien Trademarks Customer relationships Equipment (net) Goodwill Total Assets [D] [A] [A] (E] 102,000 130,000 86,100 3,450 58,500 17,220 34,500 [E] [A] 1,100,000 296,000 884,500 68,880 1,364,950 58,500 3,586,530 [A] 3,258,930 819,200

100,000 Liabilities Common stock Retained Earnings (above) Total Liabilities and equity (1,143,900) (400,000) (1,715,030) (3,258,930) (327,600) (100,000) [S] (391,600) (819,200) 1 (1,471,500) (400,000) (1,715,030) (3,586,530) 9 77,100 977,100 Entries Explanation [1] is to eliminate the intercompany income [D] is to eliminate the intercompany dividend [S] is to eliminate the stockholders equity of the subsidiary [A] is to record the difference of market value and fair value at the at the acquisition [E] Is to record the amortization and depreciation expenses on excess / short value Consolidated Entry of Investment in O'Brien Amount Entry Income from O'Brien 198,830 Entry S (Subsidiary Equity Holding) Common Stock 100,000 Beginning Retained Earnings 281,000 Entry A (to record excess value) Trademarks 130,000 Customer relationships 86,100 Equipment (34,500) Goodwill 58,500 819,930