Question

On January 1, 2021, Brooks Corporation exchanged $1,255,500 fair-value consideration for all of the outstanding voting stock of Chandler, Inc. At the acquisition date, Chandler had a book value equal to $1,167,500. Chandler’s individual assets and liabilities had fair values equal to their respective book values except for the patented technology account, which was undervalued by $192,000 with an estimated remaining life of six years. The Chandler acquisition was Brooks’s only business combination for the year.

In case expected synergies did not materialize, Brooks Corporation wished to prepare for a potential future spin-off of Chandler, Inc. Therefore, Brooks had Chandler maintain its separate incorporation and independent accounting information system as elements of continuing value.

On December 31, 2021, each company submitted the following financial statements for consolidation. Dividends were declared and paid in the same period.

	Brooks Corp.				Chandler Inc.
Income Statement
Revenues	$	(584,500	)		$	(599,000	)
Cost of goods sold		179,000				205,000
Gain on bargain purchase		(104,000	)			0
Depreciation and amortization		137,000				167,000
Equity earnings from Chandler		(195,000	)			0
Net income	$	(567,500	)		$	(227,000	)
Statement of Retained Earnings
Retained earnings, 1/1	$	(1,570,000	)		$	(867,500	)
Net income (above)		(567,500	)			(227,000	)
Dividends declared		150,000				70,000
Retained earnings, 12/31	$	(1,987,500	)		$	(1,024,500	)
Balance Sheet
Current assets	$	185,000			$	444,500
Investment in Chandler		1,484,500				0
Trademarks		172,000				229,000
Patented technology		310,000				453,000
Equipment		624,000				396,000
Total assets	$	2,775,500			$	1,522,500
Liabilities	$	(253,000	)		$	(198,000	)
Common stock		(535,000	)			(300,000	)
Retained earnings, 12/31		(1,987,500	)			(1,024,500	)
Total liabilities and equity	$	(2,775,500	)		$	(1,522,500	)

Note: Parentheses indicate a credit balance.

a. Determine the following account balances:

• Gain on bargain purchase.
• Earnings from Chandler.
• Investment in Chandler.

b. Prepare a December 31, 2021, consolidated worksheet for Brooks and Chandler.

Accounts Amounts Gain on bargain purchase Equity earnings in Chandler Investment in Chandler 12/31/21

Answer 1

a) Determine the following balances

Gain of bargain purchase
Consideration transferred by books corporation		1255500
Less: acquisition of fair value of chandler’s
Chandlers book value	1167500
Undervolted patent	192000
Total acquired fair value of chandler’s		(1359500)
Gain of bargain purchase		(104000)

Earnings from chandler
Net income of chandler	227000
Less: amortization of patent	(32000)
Equity earnings from chandler	195000

Investment in chandler 12/31/21
Fair value asset acquired	1359500
Equity earnings from chandler	195000
Less: dividend declared by chandler	(70000)
Investment in chandler 12/31/21	1484500

b)

Brooks and chandler

Consolidation worksheet

For year ending December 31, 2021

			Consolidation entries
Accounts	Brooks	Chandler	Debit	Credit	Consolidated totals
Income statement
Revenues	$ (584500)	$ (599000)			(1183500)
Cost of goods sold	179000	205000			384000
Gain on bargain purchase	(104000)	0			(104000)
Depreciation and amortization	137000	167000	32000		336000
Equity earnings in chandler	(195000)	0	195000
Net income	$ (576500)	$(227000)			(576500)
Statement of retained earnings
Retained earnings 1/1	$ (1570000)	$(867500)	867500		(1570000)
Net income	(576500)	(227000)			(576500)
Dividend declared	150000	70000		70000	150000
Retained earnings 12/31	$(1987500)	$(1024500)			1987500)
Balance sheet
Current assets	$185000	$444500			629500
Investment in chandler	1484500	0	70000	1554500	0
trademarks	172000	229000			401000
Patented technology	310000	453000	192000	(32000)	923000
equipment	624000	396000			1020000
Total assets	$2775500	$1522500			$2973500
liabilities	$(253000)	$(198000)			$(451000)
Common stock	(535000)	(300000)	300000		(535000)
Retained earnings 12/31	(1987500)	(1024500)			(1987500)
Total liabilities and equity	$(2775500)	$(1522500)	$1656500	$1656500	$(2973500)