Problem

Patrick Corporation acquired 100 percent of O’Brien Company’s outstanding common stock on...

Patrick Corporation acquired 100 percent of O’Brien Company’s outstanding common stock on January 1, for $550,000 in cash. O’Brien reported net assets with a carrying amount of $350,000 at that time. Some of O’Brien’s assets either were unrecorded (having been internally developed) or had fair values that differed from book values as follows:

 

Book Values

Fair Values

Trademarks (indefinite life)

$ 60,000

$160,000

Customer relationships (5-year life)

-0-

75,000

Equipment (10-year life)

342,000

312,000

Any goodwill is considered to have an indefinite life with no impairment charges during the year.

Following are financial statements at the end of the first year for these two companies prepared from their separately maintained accounting systems. Credit balances are indicated by parentheses.

 

Patrick

O’Brien

Revenues

$(1,125,000)

$(520,000)

Cost of goods sold

300,000

228,000

Depreciation expense

75,000

70,000

Amortization expense

25,000

-0-

Income from O’Brien

(210,000)

-0-

Net Income

$(935,000)

$(222,000)

Retained earnings 1/1

(700,000)

(250,000)

Net Income

(935,000)

(222,000)

Dividends paid

142,000

80,000

Retained earnings 12/31

$(1,493,000)

$(392,000)

Cash

$185,000

$105,000

Receivables

225,000

56,000

Inventory

175,000

135,000

Investment in  O’Brien

680,000

-0-

Trademarks

474,000

60,000

Customer Relationships

-0-

-0-

Equipment (net)

925,000

272,000

Goodwill

-0-

-0-

Total assets

$2,664,000

$628,000

Liabilities

(771,000)

(136,000)

Common stock

(400,000)

(100,000)

Retained earnings 12/31

(1,493,000)

(392,000)

Total liabilities and equity

$(2,664,000)

$(628,000)

a. Show how Patrick computed the $210,000 Income of O’Brien balance. Discuss how you determined which accounting method Patrick uses for its investment in O’Brien.

b. Without preparing a worksheet or consolidation entries, determine and explain the totals to be reported for this business combination for the year ending December 31.

c. Verify the totals determined in part (b) by producing a consolidation Worksheet forPatrickand O’Brien for the year ending December 31.

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