Question

The Holtz Corporation acquired 80 percent of the 100,000 outstanding voting shares of Devine, Inc., for $6.40 per share on January 1, 2017. The remaining 20 percent of Devine’s shares also traded actively at $6.40 per share before and after Holtz’s acquisition. An appraisal made on that date determined that all book values appropriately reflected the fair values of Devine’s underlying accounts except that a building with a 5-year future life was undervalued by $62,000 and a fully amortized trademark with an estimated 10-year remaining life had a $67,000 fair value. At the acquisition date, Devine reported common stock of $100,000 and a retained earnings balance of $260,000. Following are the separate financial statements for the year ending December 31, 2018: Holtz Corporation Devine, Inc. Sales $ (787,000 ) $ (392,000 ) Cost of goods sold 282,000 105,000 Operating expenses 346,000 117,000 Dividend income (16,000 ) 0 Net income $ (175,000 ) $ (170,000 ) Retained earnings, 1/1/18 $ (727,000 ) $ (330,000 ) Net income (above) (175,000 ) (170,000 ) Dividends declared 50,000 20,000 Retained earnings, 12/31/18 $ (852,000 ) $ (480,000 ) Current assets $ 379,500 $ 162,000 Investment in Devine, Inc 512,000 0 Buildings and equipment (net) 785,000 422,000 Trademarks 148,000 206,000 Total assets $ 1,824,500 $ 790,000 Liabilities $ (652,500 ) $ (210,000 ) Common stock (320,000 ) (100,000 ) Retained earnings, 12/31/18 (above) (852,000 ) (480,000 ) Total liabilities and equities $ (1,824,500 ) $ (790,000 ) At year-end, there were no intra-entity receivables or payables. Prepare a worksheet to consolidate these two companies as of December 31, 2018. Prepare a 2018 consolidated income statement for Holtz and Devine. If instead the noncontrolling interest shares of Devine had traded for $4.89 surrounding Holtz’s acquisition date, what is the impact on goodwill?

Answer 1

Part A

HOLTZ CORPORATION AND DEVINE INC.

Consolidated Worksheet

For the year ending December 31, 2018

Accounts	Holtz corporation	Devine Inc.			Noncontrolling interest	Consolidated total s
			Debit	Credit
Sales	(787000)	(392000)				(1179000)
Cost of goods sold	282000	105000				387000
Operating expenses	346000	117000	19100			482100
Dividend income	(16000)	0	16000
Separate company net income	(175000)	(170000)
Consolidated net income						(309900)
NI attributable to noncontrolling interest					(30180)	30180
NI attributable to Holtz Corp.						(279720)
Retained earnings, 1/1	(727000)	(330000)	330000	40720		(767720)
Net income	(175000)	(170000)				(279720)
Dividends declared	50000	20000		16000	4000	50000
Retained earnings, 12/31	(852000)	(480000)				(997440)
Current assets	379500	162000				541500
Investment in Devine	512000		40720	552720		0
Buildings and equipment (net)	785000	422000	49600	12400		1244200
Trademarks	148000	206000	60300	6700		407600
Goodwill			151000			151000
Total assets	1824500	790000				2344300
Liabilities	(652500)	(210000)				(862500)
Common stock	(320000)	(100000)	100000			(320000)
Retained earnings 12/31	(852000)	(480000)				(997440)
NCI in Devine, 1/1				138180	(138180)
NCI in Devine, 12/31					(164360)	(164360)
	(1824500)	(790000)	766720	766720		(2344300)

Fair value allocation and amortization

Consideration transferred by Holtz (100000*6.40*80%)	512000
Noncontrolling interest fair value (100000*6.40*20%)	128000
Devine total fair value 1/1/17	640000
Devine book value 1/1/17 (100000+260000)	(360000)
Fair value in excess of book value	280000
Excess fair value assigned to specific accounts based on fair value:		Remaining life	Annual excess amortizations
Building	62000	5	12400
Trademark	67000	10	6700
Goodwill (280000-62000-67000)	151000	indefinite	0
			19100

NI attributable to noncontrolling interest = (170000-19100)*20% = 30180

Change in subsidiary RE from 1/1/17 to 1/1/18 (330000-260000)	70000
Excess amortization for 2017	19100
Adjusted subsidiary RE increase	50900
Percentage of ownership by parent	80%
*C conversion entry	40720

62000-12400 = 49600

67000-6700 = 60300

Part B

HOLTZ CORPORATION AND DEVINE INC.

Consolidated Income Statement

For the year ending December 31, 2018

Sales		$1179000
Cost of goods sold	387000
Operating expenses	482100
Total expenses		869100
Consolidated net income		$309900
To noncontrolling interest (20%)		$61980
To Holtz corporation (80%)		$247920

Part C

Goodwill

decline

to

$120800

Consideration transferred by Holtz (100000*6.40*80%)	512000
Noncontrolling interest fair value (100000*4.89*20%)	97800
Devine fair value	609800
Fair value of Devine’s underlying net assets (100000*4.89)	489000
Goodwill	$120800