Dr. M.D. Chase
Advanced Accounting-305-16B
Long Beach State University
Purchase: Analysis/Eliminations
Page 1
I. PURCHASE EXAMPLE WITH ANALYSIS, ELIMINATIONS AND WORKSHEET
Facts:
1.
“P" pays $790,000 for 80% of "S" (8,000) shares on 3/1/x1.
2.
$25,000 of direct acquisition costs are also incurred in the purchase, of which $15,000 covered SEC related expenses.
3.
At the time of the purchase "S" had the following balance sheet:
Historical
Assets
Inventory..........................
Dr. (Cr)
Cost
$
Land...............................
FMV
75,000 $
Difference
80,000
150,000
200,000
Building ..........................
600,000
500,000
A/D-Building..
(300,000)
Equipment..........................
150,000
A/D-Equipment.
(50,000)
Goodwill...........................
$
5,000
50,000
200,000 net
80,000
( 20,000)
Note the presence of pre-existing
GW…What implications does this
have for your analysis?
125,000
Total assets................. $
750,000
Liabilities and Equities
Current............................
$
Bonds (6% due 12/31/x4)......
50,000 $
200,000
50,000
Common Stock ($10 par)......... 100,000
n/a
PIC in excess of par
150,000
n/a
250,000
n/a
Retained earnings..............
Total liabilities........
$
$
186,752
750,000
0
13,248
$
243,248
$
194,598
.8
Remember: This represents the
excess of cost>BV necessary to bring
all the accounts up to FMV…
OTHER DATA:
a)
the remaining life of the building is 20 years
b)
the remaining life of the equipment is 5 years
c)
the market rate of interest on the bond is 8%.
d)
“S” had net income of $70,000 (of which $10,000 was earned prior to 3/1/x1) and paid dividends of $20,000 in year x1.
e)
During year x1 "P" and "S" had the following totals:
"P"
Sales....
350,000
"S"
210,000
COS.....
150,000
80,000
Expenses....
120,000
60,000
REQUIRED:
a.
This is critical information. Remember, “P” is not
entitled to consolidate income earned by “S” prior
to the purchase. This represents “Purchased NI”
and must be accounted for (eliminated) during the
analysis of the investment.
Analyze the investment
b. Analyze the investment assuming that "P" had paid only $490,000 instead of $790,000 as above.
c.
Analyze the investment assuming that "P" had paid only $390,000.
d. present the consolidated elimination entries for requirement a.
e.
compute total NI; MI NI; controlling NI; MI
f.
prepare the consolidated worksheet
Dr. M.D. Chase
Advanced Accounting-305-16B
Long Beach State University
Purchase: Analysis/Eliminations
Page 2
SOLUTION-REQUIREMENT
a: Analyze the investment:
A.
Analysis based on cost of $790,000
Cost ($790,000 + $10,000)............................ $
Purchased BV C/S:
Remember: All charges related to SEC or stock
issuance costs are expensed in a purchase
consolidation; other charges are capitalized.
800,000
100,000
PIC:
150,000
RE:
250,000
500,000 (.8) ..........
400,000
Excess of cost over BV....................................
400,000
Add: Preexisting GW (125,000)(.8)...............
Be certain you note how pre-existing GW is
treated…
100,000
Adjusted excess:.............................................
500,000
As noted on the prior page, Purchased NI is
another problematic issue. Do you understand
what it is and how it was computed?
Attributable to:
Purchased net income: ................
8,000
FMV accounts (CA;Liabilities;MES):
Inventory (.8)(5,000).....
4,000
Liabilities (.8)(13,248)..........
10,598
Available to NCA:
Purchased NI is Subsidiary NI earned prior to
the purchase in the year of purchase. This is
income that “P” is not entitled to include in the
consolidated net income and therefore must be
accounted for in the purchase.
22,598
477,402
NCA:
Land (.8)(50,000).................
Building (.8)(200,000)............
Equipment (.8)(20,000 cr).....
In this case you were told that “S” earned
$10,000 prior to acquisition. Since “P” acquired
and 80% interest, purchased NI is 10,000(.8)
or $8,000
40,000
160,000
184,000
(16,000)
Balance to Goodwill...................
293,402
SOLUTION-REQUIREMENT b: Analysis based on cost of $490,000
Cost ($490,000 + $10,000).................
Purchased BV C/S:
$
500,000
100,000
PIC:
150,000
RE:
250,000
500,000 (.8) ..........
400,000
Excess of cost over BV....................................
100,000
Add: Preexisting GW....
It is essential to take note that this is GW created
by the purchase after eliminating (adding back) the
pre-existing GW. REMEMBER: ALL GOODWILL
RECOGNIZED IN THE CONSOLIDATION MUST BE
A RESULT OF THE PURCHASE AND NOT PREEXISTING…
100,000
Adjusted excess:.............................................
200,000
Attributable to:
Purchased net income: ................
8,000
FMV accounts (CA;Liabilities;MES):
Inventory (.8)(5,000)
Liabilities (.8)(13,248)..........
4,000
402
10,598
22,598
Available to NCA:
177,402
NCA: Land (See table)..................
38,308
Building (See table)..............
155,771
Equipment (.8)(20,000 cr)....... . (16,667)
Excess available to GW................
177,402
-0-
Excess Available to NCA + (BV of NCA)(% ownership)
$177,402 + (150,000+300,000+100,000)(.8)= $617, 402
Allocate to NCA in proportion of relative FMV;
Rel. $
Rel %
Adj.
NCA
FMV
FMV
TV
Val
BV
Land
200
200/
617,402
158,308
120,000
780
Build
500
500/
617,402
395,771
240,000
780
Equip
80
80/7
617,402
63,323
80,000
80
Total 780
780/
617,402
780
Adj.
Req.
38,308
155,771
(16,667)
177,402
Dr. M.D. Chase
Advanced Accounting-305-16B
Long Beach State University
Purchase: Analysis/Eliminations
Page 3
SOLUTION-REQUIREMENT c: Analysis based on cost of $390,000
Cost ($390,000 + $10,000)............
Purchased BV C/S:
$
400,000
100
PIC:
150
RE:
250
500 (.8) .....
400,000
Excess of cost over BV....................................
-0-
Add: Preexisting GW.......................................
100,000
Adjusted excess:.............................................
100,000
Attributable to:
Purchased net income: .....
8,000
FMV accounts (CA;Liabilities;MES):
Inventory (.8)(5,000).............
4,000
Liabilities (.8)(13,248)..........
10,590
22,598
Available to NCA:
NCA:
Adj.
Req.
12,667
91,668
(26,933)
77,402
77,402
Land (See table).
12,667
Building (See table)..........
Equipment (See table)....
Excess Available to NCA + (BV of NCA)(% ownership)
$77,402 + (150,000+300,000+100,000)(.8)= $517, 402
Allocate to NCA in proportion of relative FMV;
Rel. $
Rel %
Adj.
NCA
FMV
FMV
TV
Val
BV
Land
200
200/
517,402
132,667
120,000
780
Build
500
500/
517,402
331,668
240,000
780
Equip
80
80/7
517,402
53,067
80,000
80
Total 780
780/
617,402
780
91,668
(26,933) 77,402
Excess available to GW................
-0-
SOLUTION-REQUIREMENT d: Consolidated elimination entries based on requirement (a) (Parent is on the equity method)
a. Eliminate current year investment account entries:
Equity in "S" NI........................ 48,000
Dividends............................
16,000
Investment in "S"....................
32,000
You are expected to understand how to use the
“effective interest method” of bond amortization
necessary to solve this problem. If you don’t, please
review your Intermediate Accounting and/or see me
at office hours.
b. Eliminate "P" pro rata share of "S" SHE:
"S" C/S (.8)($100,000).................. 80,000
"S" PIC (.8)($150,000)................. 120,000
"S" RE (.8)($250,000)................. 200,000
Investment in "S"...................
400,000
c. Allocate the excess of cost over book value per analysis:
Purchased NI (.8)(10,000).........
8,000
COS (inventory assumes FIFO)(.8)($5,000)..
4,000
Liabilities (per analysis)................
10,598
Land (.8)($50,000)..................
40,000
A/D Building (.8)($200,000)...............
160,000
Goodwill (per analysis).....
193,402
Equipment (.8)($20,000)..............
**
Carrying value of bonds at 1/1/x1: $200,000 (.8) =
Less: discount
(200,000-186,752)(.8)
160,000
10,598
Carrying Value
149,402
16,000
Investment in "S"....................
400,000
d. Amortize the excess of cost over book value (the dif. between values based on "P" life and values and "S" life and values)
Depreciation expense (8,000)(10/12).
6,667
Year
Bond Amortization Expense (2,352)(10/12) 1,960
A/D (16,000/5) (10/12)....................
2,667
A/D PP&E ($160,000/20) (10/12)......
6,667
Discount on B/P (2,352)(10/12).......
1,960**
Depreciation expense-building........
2,667
Note that GW is not subject to amortization; GW is
checked annually for “impairment” and written off
against NI (expensed) if its value has declined
:
8%
6%
Effective
Stated
Rate
Rate
Amort.
Carrying
Value
0
149,402
1
11,592
9,600
2,352
151,754
2
12,140
9,600
2,540
154,294
3
12,344
9,600
2,744
157,038
4
12,563
9,600
2,963
160,001
Total
48,639
10,599
Dr. M.D. Chase
Advanced Accounting-305-16B
Long Beach State University
Purchase: Analysis/Eliminations
Page 4
e. compute total net income, MI net income and controlling interest net income
Adjustments/Eliminations
_
"P" Inc.
"S" Inc.
Sales........................................
(350,000)
(210,000)
Cost of goods sold...........................
150,000
80,000
Expenses.....................................
120,000
60,000
Dr
230,000
6,667
Amortization Expense (Downstream)............
1,960
(2,667)
Depreciation Expense-Building (Downsream)
( 80,000)
185,960
( 70,000)
8,627
( 2,667)
Total net [income] loss......................
to Minority interest (MI%)(SIGNI+UPCR-UPDR)=(.2)(70,000)............................................
to Controlling interest PIGNI+P%(SADJNI)+DNCR-DNDR)=-(80,000)+(.8)(70,000)+2,667-8,627.............
Total Income of the Consolidated Entity
Net Income
( 560,000)
Depreciation Expense (Downstream)............
Internally Generated Net Income..............
Consolidated
CR
( 144,040)
14,000 income
130,040 income
(144,040)
SOLUTION-REQUIREMENT f: The consolidated worksheet can be created and checked against the results of part e above.