Question

Miller Company acquired an 80 percent interest in Taylor Company on January 1, 2016. Miller paid $888,000 in cash to the owners of Taylor to acquire these shares. In addition, the remaining 20 percent of Taylor shares continued to trade at a total value of $222,000 both before and after Miller’s acquisition.

On January 1, 2016, Taylor reported a book value of $634,000 (Common Stock = $317,000; Additional Paid-In Capital = $95,100; Retained Earnings = $221,900). Several of Taylor’s buildings that had a remaining life of 20 years were undervalued by a total of $84,500.

During the next three years, Taylor reports income and declares dividends as follows:

Year	Net Income			Dividends
2016	$	74,300		$	10,800
2017		97,200			16,300
2018		108,600			21,800

Determine the appropriate answers for each of the following questions:

1. What amount of excess depreciation expense should be recognized in the consolidated financial statements for the initial years following this acquisition?

2. If a consolidated balance sheet is prepared as of January 1, 2016, what amount of goodwill should be recognized?

3. If a consolidation worksheet is prepared as of January 1, 2016, what Entry S and Entry A should be included?

4. On the separate financial records of the parent company, what amount of investment income would be reported for 2016 under each of the following accounting methods?

• The equity method.
• The partial equity method.
• The initial value method.

5. On the parent company’s separate financial records, what would be the December 31, 2018, balance for the Investment in Taylor Company account under each of the following accounting methods?

• The equity method.
• The partial equity method.
• The initial value method.

6. As of December 31, 2017, Miller’s Buildings account on its separate records has a balance of $872,000 and Taylor has a similar account with a $327,000 balance. What is the consolidated balance for the Buildings account?

7. What is the balance of consolidated goodwill as of December 31, 2018?

8. Assume that the parent company has been applying the equity method to this investment. On December 31, 2018, the separate financial statements for the two companies present the following information:

	Miller Company				Taylor Company
Common stock	$	545,000			$	317,000
Additional paid-in capital		305,200				95,100
Retained earnings, 12/31/18		675,800				453,100

What will be the consolidated balance of each of these accounts?

d. On the separate financial records of the parent company, what amount of investment income would be reported for 2016 under each of the following accounting methods?

e. On the parent company’s separate financial records, what would be the December 31, 2018, balance for the Investment in Taylor Company account under each of the following accounting methods?

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	d. Investment Income e. Investment Balance The equity method $56,060 correct $1,052,562 incorrect The partial equity method $59,440 correct $1,072,960 correct The initial value method $8,640 correct $888,00 correct

Answer 1

Schedule-1 Fair value allocation and Excess Amortizations

Consideration tranferred by Miller	$ $888,000
Noncontrolling interest fair value	$222,000
Taylor's fair value	$ 1110000
Less: Taylor's book value	($634,000)
Fair value in excess of book value	$ 476000

	Excess fair value assigned to specific accounts based on fair value	Remaining life	Annual excess amortization
Excess fair value assigned to buildings	$ 84500	20 years	$ 4225
Goodwill ($ 476000 -$84500)	$ 391500	indefinite	$0
Total	$ 476000		$ 4225

Excess depreciation expense = $ 4225

(b)

Amount of goodwill = $ 391500

(c) If a consolidation worksheet is prepared as of January 1, 2016, what Entry S and Entry A should be included?

The entries are prepared as below:

Event	General Journal	Debit	Credit
Entry S	Common Stock	$317,000
	Additional Paid-In Capital	$95,100
	Retained Earnings	$221,900
	Investment in Taylor Company ($634,000*80%)		$ 507200
	Noncontrolling Interest in Taylor (634000*20%)		$ 126800
Entry A	Buildings	$84500
	Goodwill	$391500
	Investment in Taylor Company (476000*80%)		$ 380800
	Noncontrolling Interest in Taylor (476000*20%)		$ 95200

(d) On the separate financial records of the parent company, what amount of investment income would be reported for 2016 under each of the following accounting methods?

The amount of investment income under each method is calculated as below:

1) Equity Method:

Income Accrual (74,300*80%)	59440
less - Excess Amortization Expense (4225*80%)	(3380)
Investment Income	$56560

2) Partial Equity Method

Investment Income = Income Accrual*80% = 74300*80% = $59440

3) Initial Value Method

Investment Income = Dividend*80% = 10800*80% = $8640

	Investment Income
The Equity Method	$56560
The Partial Equity Method	$59440
The Initial Value Method	$ 8640

(e) On the parent company’s separate financial records, what would be the December 31, 2018, balance for the Investment in Taylor Company account under each of the following accounting methods?

Equity method:
Initial fair value paid	888000
Income accrual 2016-2018 (74,300+97,200+108,600 )*80	224080
Dividends 2016-2018 (10,800+16300+21800)*80%	(39120)
Excess amortization 2016-2018 (4225*80%*3)	(10140)
Investment in Taylor	1062820
Partial equity method:
Initial fair value paid	888000
Income accrual 2016-2018 ( 74,300+97,200+108,600 )*80	224080
Dividends 2016-2018 (10,800+16300+21800)*80%	(39120)
Investment in Taylor	1072960
Initial value method:
Investment in Taylor	888000

(f) As of December 31, 2017, Miller’s Buildings account on its separate records has a balance of $872,000 and Taylor has a similar account with a $327,000 balance. What is the consolidated balance for the Buildings account

Miller book value – buildings	$ 872000
Taylor book value – buildings	$ 327000
Allocation	$ 84500
Excess amortization for 2016-2017 (4225*2	(8450)
Consolidated buildings account	1275050

(g) Acquisition-date fair value allocated to goodwill- 391500 as per (a)

(h)

Assume that the parent company has been applying the equity method to this investment. On December 31, 2018, the separate financial statements for the two companies present the following

	Miller Company
Common stock	545,000
Additional paid-in capital	305,200
Retained earnings, 12/31/18	675,800