Question

Patrick Corporation acquired 100 percent of O’Brien Company’s outstanding common stock on January 1 for $622,100 in cash. O’Brien reported net assets with a carrying amount of $381,000 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)	$	89,500	$	220,500
Customer relationships (5-year remaining life)		0		80,100
Equipment (10-year remaining life)		396,000		348,900

Any goodwill is considered to have an indefinite life with no impairment charges during the year.

The 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	$	(1,822,500	)		$	(740,000	)
Cost of goods sold		486,000				338,000
Depreciation expense		96,600				87,000
Amortization expense		27,800				0
Income from O'Brien		(303,690	)			0
Net income	$	(1,515,790	)		$	(315,000	)
Retained earnings 1/1	$	(728,000	)		$	(281,000	)
Net income		(1,515,790	)			(315,000	)
Dividends declared		147,000				85,000
Retained earnings 12/31	$	(2,096,790	)		$	(511,000	)
Cash	$	236,000			$	139,500
Receivables		374,000				63,900
Inventory		211,000				139,000
Investment in O'Brien		840,790				0
Trademarks		610,000				66,000
Customer relationships		0				0
Equipment (net)		1,042,000				291,000
Goodwill		0				0
Total assets	$	3,313,790			$	699,400
Liabilities	$	(817,000	)		$	(88,400	)
Common stock		(400,000	)			(100,000	)
Retained earnings 12/31		(2,096,790	)			(511,000	)
Total liabilities and equity	$	(3,313,790	)		$	(699,400	)

1. Which investment method did Patrick use to compute the $303,690 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

Please refer the following image for the solution:  

Answer a Calculation of Overvalued and Undervalued Assets Book Value Fair value A B Trademarks $ 89,500 $ 220,500 $ Customer relationships $ $ 80,100 $ Equipment $ 396,000 $ 348,900 $ Difference B-A 131,000 80,100 -47,100 Investment method - Equity Method Net Income of O'Brien $ 315,000 Less : Amortization expenses $ 11,310 Adjusted Net Income of O'Brien $ 303,690 Income from O'Brien $ 303,690 As the income from O'Brien is equal to adjusted net income of O'Brien, therefore the company follows the equity method Calculation of Goodwill Acquisition price paid by Patrick Book value of O'Brien Excess Value $ $ $ 622,100 381,000 241,100 Allocation of excess value to specified assets Life (B) Assets Trademarks Customer relationships Equipment Initial value (A) $ 131,000 $ 80,100 $ -47,100 $ 164,000 Amortization per year (A/B) 0 $ 5 $ 16,020 10 $ -4,710 $ 11,310 Goodwill ($241,100 - $164,000) $ 77,100 Answer b Totals to be reported for the business combination for Revenues $ 2,562,500 Cost of goods sold $ 824,000 Amortization expense $ 43,820 Depreciation expense $ 178,890 Income from O'Brien $ Net Income $-1,515,790 Retained earnings 1/1 $ -728,000 Dividends declared $ 147,000 Retained earnings 12/31 $-2,096,790 Cash $ 375,500 Receivables $ 437,900 Inventory $ 350,000 Income from O'Brien $ Trademarks ($610,000+ $66,000 + $ 131,00) S 807,000 Customer relationships ($80,100 - $ 16,020) $ 64,080 Equipment ($1,042,000 + $ 291,000 - $42,390) $ 1,290,610 Goodwill $ 77,100 Total Assets $ 3,402,190 Liabilities $ -905,400 Common stock $ -400,000 Retained earnings 12/31 $-2,096,790 Total liabilities and equity $-3,402,190 Answerc Accounts Revenues Cost of goods sold Depreciation expense Amortization expense Income from O'Brien Net Income Retained earnings 1/1 Net income (above) Dividends declared Retained earnings 12/31 Cash Receivables Inventory Income from O'Brien Trademarks Customer relationships Equipment (net] Goodwill Total Assets Liabilities Common stock Retained earnings (above) Total liabilities and equity Patrick corporation and consolidated subsidiary O'Brien Consolidated worksheet For year ending December 31 Consolidation Entries Consolidation Patrick O'Brien Debit Credit Total $ -1,822,500 $ -740,000 $ -2,562,500 $ 486,000 $ 338,000 $ 824,000 $ 96,600 $ 87,000 S 4,710E $ 178,890 $ 27,800 $ E $ 16,020 $ 43,820 $ -303,690 $ 1 $ 303,690 $ $ -1,515,790$ -315,000 $ -1,515,790 $ -728,000 $ -281,000S $ 281,000 $ -728,000 $ -1,515,790 $ -315,000 $ -1,515,790 $ 147,000 $ 85,000 $ 85,000D $ 147,000 $ -2,096,790 % -511,000 $ -2,096,790 $ 236,000 $ 139,500 $ 375,500 $ 374,000 $ 63,900 S 437,900 $ 211,000 $ 139,000 $ 350,000 $ 840,790$ D $ 85,000$ 925,790 $ $ 610,000 $ 66,000A $ 131,000 $ 807,000 $ $ А $ 80,100 $ 16,020 E $ 64,080 $ 1,042,000 $ 291,000E $ 4,710 $ 47,100 A $ 1,290,610 $ $ A $ 77,100 $ 77,100 $ 3,313,790 $ 699,400 $ 3,402,190 $ -817,000 $ -88,400 $ -905,400 $ -400,000 $ -100,000s $ 100,000 $ -400,000 $ -2,096,790 $ -511,000 $ -2,096,790 $ 3,313,790 $ -699,400 $ 1,078,620 $ 1,078,620 $ 3,402,190 امامی Entries Explanation [1] is used to eliminate the inter company income [D] is used to eliminate the inter company dividend [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 expenses on excess / short value Consolidation entry of investment in O'Brien 303,690 100,000 281,000 Entry! Income from O'Brien $ Entry S [Subsidiary equity holding Common stock $ Beginning retained earnings $ Entry A (to record excess value] Trademarks $ Customer relationships $ Equipment $ Goodwill $ $ 131,000 80,100 -47,100 77,100 925,790 Alternate Method $ 622,100 $ 381,000 $ 241,100 Answer a O'Brien acquisition date Fair Value O'Brien Book Value Fair Value in excess of Book value Allocation Assets Trademarks Customer relationships Equipment Goodwill Total $ $ $ $ $ Life Amortization 131,000 Indefinite $ 80,100 5 years $ 16,020 -47,100 10 years $ -4,710 77,100 241,100 $ 11,310 100% of O'Brien Incoem reported Less: Amortization Net Income in Pattrick $ $ $ 315,000 11,310 303,690 Above calculation is made in Equity Method Answer b Revenues $ 2,562,500 the accounts of both companies combined Cost of goods sold $ 824,000 the accounts of both companies combined Depreciation expense $ 178,890 the accounts of both companies combined and acquisition related depreciation adjustment of $4,710 Amortization expense $ 43,820 the accounts of both companies combined and acquisition related adjustment of $16,020 Income from O'Brien $ the balance reported by the parent is removed and replaced with subsidiary's individual revenue and expense Net Income $ 1,515,790 consolidated revenue less expenses Retained earnings 1/1 $ 728,000 only parent's retained earnings figure is included Dividends declared $ 147,000 the subsidiary's dividend were paid to parent and thus as an intercompany transfer are eliminated Retained earnings 12/31 $ 2,096,790 the beginning balance for the parent plus consolidated net income less consolidated (parent) dividend Cash $ 375,500 the accounts of both companies combined Receivables $ 437,900 the accounts of both companies combined Inventory $ 350,000 the accounts of both companies combined Investment in O'Brien $ - the parent's balance is removed and replaced with the subsidiary's individual asset and liability accounts Trademarks $ 807,000 the accounts of both companies combined plus $131,000 fair value adjustment Customer relationships $ 64,080 initial $80,100 fair value adjustment less amortization expense of $16,020 Equipment $ 1,290,610 the accounts of both companies combined less $47,100 fair value adjustment net of $4710 in deprecaition expense reduction Goodwill $ 77,100 original allocation Total Assets $ 3,402,190 summation of consolidate balances Liabilities $ 905,400 the accounts of both companies combined Common stock $ 400,000 parent balance only Retained earnings 12/31 $ 2,096,790 computed above Total liabilities and equity $ 3,402,190 summation of consolidate balances Answer c Patrick corporation and consolidated subsidiary O'Brien Consolidated worksheet For year ending December 31 Consolidation Entries Accounts Patrick O'Brien Debit Credit Revenues $ -1,822,500 $ -740,000 Cost of goods sold $ 486,000 $ 338,000 Depreciation expense $ 96,600 $ 87,000 S 4,710 E Amortization expense $ 27,800 $ E $ 16,020 Income from O'Brien $ -303,690 $ I $ 303,690 Net Income $ -1,515,790 $ -315,000 $ 319,710 $ 4,710 Retained earnings 1/1 $ -728,000 $ -281,000 S $ 281,000 Net income (above) $ -1,515,790 $ -315,000 Dividends declared $ 147,000 $ 85,000 $ 85,000D Retained earnings 12/31 $ -2,096,790 $ -511,000 $ 281,000 $ 85,000 Cash $ 236,000 $ 139,500 Receivables $ 374,000 $ 63,900 Inventory $ 211,000 $ 139,000 Investment in O'Brien $ 840,790$ D $ 85,000$ 381,000S $ 241,100A $ 303,6901 Trademarks $ 610,000 $ 66,000 A $ 131,000 Customer relationships $ A $ 80,100 $ 16,020 E Equipment [net] $ 1,042,000 $ 291,000E $ 4,710 $ 47,100A Goodwill $ $ A $ 77,100 Total Assets $ 3,313,790 $ 699,400 Liabilities $ -817,000 $ -88,400 Common stock $ -400,000 $ -100,000 S $ 100,000 Retained earnings (above) $ -2,096,790 % -511,000 Total liabilities and equity $ -3,313,790 $ -699,400 $ 1,679,330 $ 1,168,330 Consolidation Total $ -2,562,500 $ 824,000 S 178,890 $ 43,820 $ $ -1,515,790 $ -728,000 $ -1,515,790 $ 147,000 $ -2,096,790 $ 375,500 $ 437,900 $ 350,000 S $ 807,000 $ 64,080 $ 1,290,610 $ 77,100 $ 3,402,190 $ -905,400 $ -400,000 $ -2,096,790 $ -3,402,190