Question

On January 1, 2017, Dirt Company acquired all of Cat Company's voting stock for $16,000 in cash. Some of Cat's identifiable assets at the date of acquisition had fair values that are different from reported values, as follows:

	Fair Value	Book Value
Plant assets, net (20-year remaining life, straight-line)	3,000	11,000
Identifiable intangibles that should be capitalized (5-year remaining life, straight-line)	10,000	0

Cat's total shareholders' equity at January 1, 2017, was $4,000. It is now December 31, 2020 (four years later). Cumulative impairment for the goodwill recognized on this acquisition, to the beginning of 2020, is $2,000. Goodwill impairment for 2020 is $500. Dirt uses the complete equity method to account for its investment in Cat Company on its own books.

December 31, 2020 trial balances for Dirt and Cat appear below

	Dirt Company	Cat Company
	DR (CR)	DR (CR)
Current Assets	5,000	2,500
Plant assets, net	34,800	28,000
Investment in Cat Company	23,600
Liabilities	(22,000)	(10,000)
Capital Stock	(15,000)	(2,000)
Retained Earnings, Jan. 1	(25,000)	(16,000)
Sales Revenue	(25,000)	(14,000)
Equity in net income of Cat	(400)
Cost of Sales	20,000	8,000
Operating Expenses	4,000	3,500
Total	0	0

Required:

A. Compute goodwill at acquisition.

B. Prepare the working paper to consolidate Dirt and Cat's trial balances at December 31, 2020. Must designate the elimination entries appropriately (C), (E), (R), and (O).

C. Prepare the consolidated income statement for 2020 and the consolidated balance sheet at December 31, 2020 in good form

Answer 1

A	Computation of goodwill at acquisition
	Cash paid for acquisition	$16,000
	Less: Net assets of Cat Company	$4,000
	Excess of fair value over book value	$12,000
	Excess allocated to
	Plant assets	($8,000)
	Identifible intangibles	$10,000
	Goodwill	$10,000
	Consolidation Worksheet
					Consolidation Entries
		Dirt Company	Cat Company		Dr.	Cr.		Consolidated
	Sales	($25,000)	($14,000)					($39,000)
	Equity in net income of Cat	($400)		E	$400			$0
	Cost of Sales	$20,000	$8,000					$28,000
	Operating expenses	$4,000	$3,500	O	$2,500	$400		$9,600
	Net profit	($1,400)	($2,500)					($1,400)
	Retained Earnings, Jan 1	($25,000)	($16,000)	C	$17,600			($23,400)
	Net Income	($1,400)	($2,500)					($1,400)
	Retained Earnings, Dec 31	($26,400)	($18,500)					($24,800)
	Assets
	Current Assets	$5,000	$2,500					$7,500
	Plant assets, net	$34,800	$28,000	E	$400	$6,400	R	$56,800
	Investment in Cat company	$23,600				$19,600	C	$0
						$3,600	R
						$400	E
	Indentifible Intangibles			R	$2,000	$2,000	O	$0
	Goodwill			R	$8,000	$500	O	$7,500
	Total	$63,400	$30,500					$71,800
	Liabilities and Stockholders' Equity
	Liabilities	($22,000)	($10,000)					($32,000)
	Common Stock	($15,000)	($2,000)	C	$2,000			($15,000)
	Retained Earnings	($26,400)	($18,500)					($24,800)
	Total	($63,400)	($30,500)		$32,900	$32,900		($71,800)
C	Consolidated Income Statement
	Sales	(39,000)
	Cost of goods sold	28,000
	Gross Profit	(11,000)
	Operating expenses	9,600
	Net Operating income	(1,400)
	Consolidated Balance Sheet 2020
	Assets
	Current Assets	7,500
	Plant Assets, net	56,800
	Goodwill	7,500
	Total Assets	71,800
	Liabilities and Stockholder's Equity
	Liabilities	(32,000)
	Stockholder's Equity
	Common Stock	(15,000)
	Retained Earnings	(24,800)
	Total Stockholder's Equity	(39,800)
	Total Liabilities and Stockholder's Equity	(71,800)