Question

Problem 1 (40 Points)

Big Company acquired 100 percent of Small Company's voting stock on January 1, 2011, by issuing 10,000 shares of its $10 par value common stock (having a fair value of $14 per share). As of that date, Small had stockholders' equity totaling $105,000. Land shown on Small's accounting records was undervalued by $10,000. Equipment (with a 5-year remaining life) was undervalued by $5,000. A secret formula developed by Small was appraised at $20,000 with an estimated life of 20 years.

Big Company $ Revenues Cost of goods sold Depreciation expense Subsidiary eamings Net income (485,000) 160,000 130,000 (66,000) (261,000) Small Company ($190,000) 70,000 52,000 -0- $ (68,000) $ $ Retained eamings, 1/1/15 Net in come (above) Dividends declared Retain ed eam ings, 12/31/15 (659,000) (261,000) 175,500 (744,500) ($98,000) (68,000) 40,000 ($126,000) $ $ $ Current assets Investment in Small Company Land Buildings and equipment (net) Total assets 268,000 216,000 427,500 713,000 1,624,500 75,000 - -a 58,000 161,000 294,000 $ $ Current liabilities Long-term liabilities Common stock Additional paid-in capital Retained eamings, 12/31/15 Total liabilities and equity $ (110,000) (80.000) (600,000) (90,000) (744,500) ($1,624,500) $ (19,000) (84,000) (60,000) (5,000) (126,000) ($294.000)

Following are the separate financial statements for the two companies for the year ending December 31, 2015. There were no intra-entity payables on that date. Credit balances are indicated by parentheses.

Required: Using Excel

1. Prepare an Allocation of Acquisition-Date Fair Value Schedule.
2. Determine annual excess amortization amounts.
3. Explain how Big Company determined the $66,000 amount for subsidiary earnings.
4. Prepare a worksheet to consolidate the financial statements.

Questions

Answer the following questions using complete sentences and appropriate grammar.

1. When a parent company uses the equity method to account for an investment in a subsidiary, why do both the parent's Net Income and Retained Earnings account balances agree with the consolidated totals?
2. Several years ago, Jenkins Company acquired a controlling interest in Lambert Company. Lambert recently borrowed $100,000 from Jenkins. In consolidating the financial records of these two companies, how will this debt be handled?

Answer 1

Particulars	Calculations	Amount
Small Company's earnings		$ 68,000.00
less: amortization of undervaluation of equipment	$ 5,000/5	$ (1,000.00)
less: amortization of secret formula	$ 20,000/20	$ (1,000.00)
Subsidiary earnings in Big Company's books		$ 66,000.00

Assets	Calculations	Amount
Current Assets	268000 + 75000	$            343,000
Land	427500 + 58000 + 10000	$            495,500
Building & Equipments	713000 + 161000 - 5000 + 1000	$            870,000
Secret Formula	20000 - 1000	$              19,000
Liabilities		$        1,727,500
Current Liabilities	110000 + 19000	$            129,000
Long term liabilities	80000 + 84000	$            164,000
Common Stock		$            600,000
Additional paid in capital		$              90,000
Retained Earnings		$            744,500
Total		$        1,727,500

The debt in books of Lambert Company will be set off by the advances in the books of Jenkins company.