Question

Haynes, Inc. obtained 100% of Turner Company's common stock on January 1, 2018, by issuing 50,000 shares of common stock that was trading at $35 per share. The acquisition agreement also contained a contingent consideration clause to which Haynes assigned a fair value of $100,000. On January 1, 2018, Turner reported a net book value of $1,500,000. However, Equipment (5-year life) was undervalued by $150,000. Also, Turner had research and development in process with an assessed value of $100,000, although no value had been recorded on Turner's books. Any remaining excess of fair value over book value was attributed to Goodwill. During 2018, Turner reported Net Income of $360,000 and paid Dividends of $120,000. The following figures come from the individual accounting records of the two companies as of December 31, 2019. Net Income of Haynes is from its own operations and excludes any income from Turner: Haynes Turner Net Income $825,000 $380,000 Investment Income not given Dividends Paid $300,000 $145,000 Equipment $600,000 $275,000 Fair Value Analysis: a) What is consolidated Net Income for the year ended December 31, 2019 b) What is the consolidated Equipment balance at December 31, 2019: c) What balance does Hayne's Investment in Turner account show on December 31, 2019 when the equity method is applied? d) If Haynes has applied the initial value method, what adjustment is needed to the beginning balance of Retained Earnings on a December 31, 2019 consolidation worksheet? e) If Haynes has applied the partial value method, what adjustment is needed to the beginning balance of Retained Earnings on a December 31, 2019 consolidation worksheet?

Answer 1

Part A

Net income of Haynes	825000
Net Income of Turner	380000
Depreciation expense	(30000)
Consolidated net income 2019	$1175000

Acquisition fair value (consideration paid by Haynes) (50000*35)+100000			1850000
Book value equivalency			(1500000)
Excess of Turner fair value over book value			350000
Excess fair value assigned to specific accounts based on fair value		Remaining life	Annual excess amortizations
Equipment	150000	5	30000
Research and development	100000	indefinite	0
Goodwill	100000	Indefinite	0
Totals	$350000		$30000

Part B

Equipment balance Haynes	600000
Equipment balance Turner	275000
Allocation based on fair value	150000
Depreciation for 2018‑2019	(60000)
Consolidated equipment—December 31, 2019	$965000

Part C

Retained earnings = understated by $210000 (360000-120000-30000)

Account titles and explanation	Debit	Credit
Investment in turner	210000
Retained earnings (1/1/19) Haynes		210000

$210000 is added to beginning balance of retained earnings

Part D

Retained earnings = overstated by $30000 (as parent would have failed to record amortization expense)

Account titles and explanation	Debit	Credit
Retained earnings (1/1/19) Haynes	30000
Investment in turner		30000

$30000 is subtracted from beginning balance of retained earnings

Part E

No adjustment is required to beginning balance of retained earnings as consolidated retained earnings would equal the parent's retained earnings.