Question

Indicated by parentheses). Michael acquired all of Aaron's outstanding voting stock on January 1, 2017. by Issuing 20,000 shares of Its own $1 par common stock. On the acquisition date, Michael Company's stock actively traded at $3250 per share. Aaron Company 12/31/21 $ (418,588) 164,250 181,500 Revenues Cost of goods sold Amortization expense Dividend income Net income Retained earnings, 1/1/21 Net income (above) Dividends declared Retained earnings, 12/31/21 Cash Receivables Inventory Investment in Aaron Company Copyrights Royalty agreements Total assets Liabilities Preferred stock Connon stock Additional paid-in capital Retained earnings, 12/31/21 Total liabilities and equity Michael Company 12/31/21 $ (689,588) 389,750 119,780 (5,000 $ (265, e5e) $(1,602,00) (265,658) 90,00 $(1,177,ese) $ 192,000 447,eee 642,00 650, eee 545, eee 1, e81, eee $ 3,477,eee $(1,199,958) (388,888) (588,eee) (388,eee) (1,177,ese) $(3,477,eee) $ (152,758) $ (730, eee) (152,750) 5.ee $ (877,750) $ 19, 180 231, eee 365,000 387,000 416,eee $ 1,418,100 $ (410,358) (188,eee) (30,eee) (877,750) $(1,418,188) On the date of acquisition, Aaron reported retained earnings of $410,000 and a total book value of $540,000. At that time, Its royalty agreements were undervalued by $60,000. This Intangible was assumed to have a six-year remaining life with no residual value. Additionally, Aaron owned a trademark with a fair value of $50,000 and a 10-year remaining life that was not reflected on its books. Aaron declared and paid dividends in the same period.

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Answer 1

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Answer a Purchase price (20000 shares * $32.50) Book value (given) Price in excess of book value (A) Excess assigned to specific accounts based on fair values $650,000 $540,000 $110,000 Royalty agreements Trademark Total (B) Goodwill (B-A) Life $ 60,000 6 years $ 50,000 10 years $110,000 $ Annual Excess Amortizations $ 10,000 $ 5,000 $ 15,000 Calculation of Annual Excess Amortisations Particulars Royalty agreements Trademark Total Remaining Annual Excess Fair value Life Amortizations $ 60,000 6 years $ 10,000 $ 50,000 10 years $ 5,000 $ 15,000 Value of acquired asset as on 31.12.21 Particulars Royalty agreements Trademark Total Amt as on Accumulated amortization 1.1.21 (1/1/17 to 31/12/20) $ 60,000 $ 40,000 $ $ 50,000 $ 20,000 $ $ 110,000 $ 60,000 $ Value as on 31.12.21 20,000 30,000 50,000 Consolidated Totals Accounts Revenues Cost of goods sold Amortization expense Dividend income Net income MICHAEL COMPANY AND CONSOLIDATED SUBSIDIARY Consolidation Worksheet For Year Ending December 31, 2021 Consolidated entries Michael Aaron Debit Credit $ -689,500 $ -418,500 $ 309,750 $ 164,250 $ 119,700$ 101,500 E $ 15,000 $ -5,000 0 1 $ 5,000 $ -265,050 $ -152,750 $ $ $ $ $ -1,108,000 474,000 236,200 -397,800 0 $ -1,262,000 s $ 730,000 Retained earnings 1/1/21 (Michael) Retained earnings 1/1/21 (Aaron) Net income (above) Dividends declared Retained earnings 12/31/21 $-1,002,000 $ $ -265,050 $ $ 90,000 $ $-1,177,050 $ -730,000 -152,750 5,000 -877,750 260,000 $ $ S 5,000 $ $ $ -397,800 90,000 -1,569,800 211,100 678,000 1,007,000 C $ 260,000 $ Cash Receivables Inventory Investment in Aaron Co. Copyrights Royalty agreements Trademark Total assets $ 192,000 $ 19,100 $ 447,000 $ 231,000 $ 642,000 $ 365,000 $ 650,000 0 $ 545,000 $ 387,000 $ 1,001,000 $ 416,000 0 0 $ 3,477,000 $ 1,418,100 $ $ $ 910,000 S+A $ $ 10,000E $ 5,000E $ $ A $ $ 20,000 $ 30,000 $ 932,000 1,427,000 25,000 4,280,100 A S Liabilities Preferred stock Common stock Additional paid-in capital Retained earnings 12/31/21(above) Total liabilities and equity $-1,199,950 $ -410,350 $ 300,000 0 $ 500,000 $ -100,000 $ 300,000 $ -30,000 $-1,177,050 $ -877,750 $-3,477,000 $ -1,418,100 $ $ 100,000 30,000 $ $ $ $ $ $ -1,610,300 -300,000 -500,000 -300,000 -1,569,800 -4,280,100 S $ 1,190,000 $ 1,190,000 Entries Explanation (C) Conversion from Initial method to Equity method Aaron' retained earnings January 1, 2021 Less : Retained earnings at date of purchase Increase since date of purchase Less : Excess amortization expenses ($15,000 x 4 years) Conversion to equity method for years prior to 2021 $730,000 $410,000 $320,000 $ 60,000 $260,000 (S) is used to eliminate the stockholders equity of the subsidiary (A) is used to record the difference of market value and fair value at the acquisition (E) is used to record the amortization and depreciation expense on excess/short value Answerb Balances as per equity method Equity in Earnings of Aaron Retained Earnings, 1/1/21 Investment in Aaron Retained Earnings, 12/31/21 $ 137,750 $ 1,262,000 $ 1,042,750 $ 1,569,800 1) Equity in Earnings of Aaron Net Income of Aaron Less : Amortization expenses Equity in Earnings of Aaron $ $ $ 152,750 15,000 137,750 2) Retained Earnings 1/1/21 Retained Earnings 1/1/21 (Initial value) Add: Increase in retained earnings of Aaron Retained Earnings 1/1/21 (Equity Method) $ 1,002,000 $ 260,000 $ 1,262,000 3) Investment in Aaron Investment in Aaron (Initial Value) Add: Increase in retained earnings of Aaron Add: Equity earnings of Aaron Less: Dividend declared by Aaron Investment in Aaron (Equity Value) $ 650,000 $ 260,000 $ 137,750 $ -5,000 $ 1,042,750 4) Retained Earnings 12/31/21 No change in retained earnings of 12/31/21 in case of equity method