Question

On July 1, 2018, Truman Company acquired a 70 percent interest in Atlanta Company in exchange for consideration of $838,075 in cash and equity securities. The remaining 30 percent of Atlanta’s shares traded closely near an average price that totaled $359,175 both before and after Truman’s acquisition.

In reviewing its acquisition, Truman assigned a $137,000 fair value to a patent recently developed by Atlanta, even though it was not recorded within the financial records of the subsidiary. This patent is anticipated to have a remaining life of five years.

The following financial information is available for these two companies for 2018. In addition, the subsidiary’s income was earned uniformly throughout the year. The subsidiary declared dividends quarterly.

	Truman				Atlanta
Revenues	$	(711,290	)		$	(550,000	)
Operating expenses		413,000				372,000
Income of subsidiary		(52,710	)			0
Net income	$	(351,000	)		$	(178,000	)
Retained earnings, 1/1/18	$	(896,000	)		$	(598,000	)
Net income (above)		(351,000	)			(178,000	)
Dividends declared		170,000				70,000
Retained earnings, 12/31/18	$	(1,077,000	)		$	(706,000	)
Current assets	$	357,715			$	531,000
Investment in Atlanta		866,285				0
Land		481,000				234,000
Buildings		789,000				651,000
Total assets	$	2,494,000			$	1,416,000
Liabilities	$	(917,000	)		$	(390,000	)
Common stock		(95,000	)			(300,000	)
Additional paid-in capital		(405,000	)			(20,000	)
Retained earnings, 12/31/18		(1,077,000	)			(706,000	)
Total liabilities and stockholders' equity	$	(2,494,000	)		$	(1,416,000	)

1. How did Truman allocate Atlanta’s acquisition-date fair value to the various assets acquired and liabilities assumed in the combination?

2. How did Truman allocate the goodwill from the acquisition across the controlling and noncontrolling interests?

3. How did Truman derive the Investment in Atlanta account balance at the end of 2018?

4. Prepare a worksheet to consolidate the financial statements of these two companies as of December 31, 2018. At year-end, there were no intra-entity receivables or payables.

Answer 1

Part A

Consideration transferred by Truman	$	838075
Non-controlling interest fair value		359175
Atlanta’s acquisition-date total fair value	$	1197250
Book value of Atlanta		(972000)
Fair value in excess of book value	$	225250
Excess fair value assigned to specific accounts based on fair value			Remaining life	Annual excess Amortizations
Patent		137000	5 years	27400
Goodwill	$	88250	indefinite	0
Total				27400

Book value = common stock + additional paid in capital + retained earnings 1/1 + (net income *1/2)

= 300000+20000+598000+((178000-70000)*1/2) = 972000

Goodwill = Fair value in excess of book value-Patent

Part B

	Controlling interest		Non-controlling interest
Fair value at acquisition date	$	838075	$	359175
Relative fair values of identifiable net assets 70% and 30% of $1109000 (acquisition date book value + patent = net asset fair value)		776300		332700
Goodwill	$	61775	$	26475

Part C

Initial value at acquisition date	$	838075
Truman’s share of Atlanta’s net income for half year ([($178,000-27400 amortization) X ½ year] X 70%)		52710
Dividends 2018 ($70,000 X ½ year X 70%)		(24500)
Investment account balance 12/31/18		$866285

Part D

TRUMAN COMPANY AND SUBSIDIARY ATLANTA COMPANY

Consolidated Worksheet

For the year ending December 31, 2018

Accounts		Truman		Altanta		Consolidated entries				Non controlling interest		Consolidated totals
						Debit		Credit
Revenues	$	(711290)	$	(550000)	(S)	275000			$		$	(986290)
Operating expenses		413000		372000		13700		186000				612700
Net income to subsidiary		(52710)				52710						0
Separate company net income		(351000)		(178000)
Consolidated net income												(373590)
Net income attributable to NCI										(22590)		22590
Net income attributable to Truman												(351000)
Retained earnings 1/1		(896000)		(598000)		598000						(896000)
Net income		(351000)		(178000)								(351000)
Dividends declared		170000		70000				59500		10500		170000
Retained earnings 12/31		(1077000)		(706000)								(1077000)
Current assets		357715		531000								888715
Investment in Atlanta		866285		0		24500		890785				0
Land		481000		234000								715000
buildings		789000		651000								1440000
Patent						137000		13700				123300
goodwill						88250						88250
Total assets		2494000		1416000								3255265
Liabilities		(917000)		(390000)								(1307000)
Common stock		(95000)		(300000)		300000						(95000)
Additional paid in capital		(405000)		(20000)		20000						(405000)
Retained earnings 12/31		(1077000)		(706000)								(1077000)
Noncontrolling interest 7/1								359175		(359175)
Noncontrolling interest 12/31										(371265)		(371265)
Total liabilities and equity		(2494000)		(1416000)		1509160	1509160					(3255265)

550000/2 = 275000

27400/2 = 13700

372000/2 = 186000

70000/2*30% =   10500

(70000/2)+(70000/2*70%) = 59500

(70000/2*70%) = 24500