Question

The Holtz Corporation acquired 80 percent of the 100,000 outstanding voting shares of Devine, Inc., for $7.20 per share on January 1, 2017. The remaining 20 percent of Devine’s shares also traded actively at $7.20 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 five-year future life was undervalued by $85,500 and a fully amortized trademark with an estimated 10-year remaining life had a $64,000 fair value. At the acquisition date, Devine reported common stock of $100,000 and a retained earnings balance of $226,500.

Following are the separate financial statements for the year ending December 31, 2018:

At year-end, there were no intra-entity receivables or payables.

a. Prepare a worksheet to consolidate these two companies as of December 31, 2018.

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b. Prepare a 2018 consolidated income statement for Holtz and Devine.

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c. If instead the noncontrolling interest shares of Devine had traded for $4.76 surrounding Holtz’s acquisition date, what is the impact on goodwill?

Answer 1

Consolidation

When a company acquires 50% or more shares of another company and has significant influence and control over the other company then in this case parent and subsidiary relation exists between the two companies. The company which acquires the share is known as parent company and the company whose shares is acquired is known as subsidiary company.

When there is control over the other company the parent company will have to prepare consolidated financial statement that is consolidate the assets and liabilities of subsidiary with that of its own.

a.

The consolidation worksheet is shown below

Following shows the working

Explanation

1. Calculation of goodwill and additional amortization expense

The additional amortization expense will increase the operating expense of subsidiary company D.

2. Dividend income is intra entity transaction and hence it is excluded in consolidation

3. The Net income attributable to NCI is net income of subsidiary ($97,000) Less additional amortization expense (23,500) this is multiplied with the NCI share of 20%.

4. Calculation for conversion of company H’s retained earnings balance from initial value method to accrual method which would increase retained earnings of company H.

5. The dividend share of parent company in subsidiary dividend declared would be reduced from the consolidation entries being intra entity transaction.

6. The investment in company D in parent company will be have to be replaced with equity method of accounting.

7. Building and trademark would be adjusted for additional increase in fair value and amortization and depreciation expense.

8. Non controlling interest share in the book value and fair value is recognized in the non controlling interest section.

b.

The consolidated income statement of the company is shown below

Following shows the working

c.

Calculation of goodwill if non controlling interest was traded at $4.76 on acquisition date

In this case the entire goodwill will belong to the controlling interest which would therefore reduce the non controlling interest.

Following shows the working