Computer Project
Alternative Investment Methods, Goodwill Impairment, and Consolidated Financial Statements
In this project, you are to provide an analysis of alternative accounting methods for controlling
interest investments and subsequent effects on consolidated reporting. The project requires the
use of a computer and a spreadsheet software package (e.g., Microsoft Excel, etc.). The use of
these tools allows you to assess the sensitivity of alternative accounting methods on consolidated
financial reporting without preparing several similar worksheets by hand. Also, by modeling a
worksheet process, you can develop a better understanding of accounting for combined reporting
entities.
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Consolidated Worksheet Preparation
You will be creating and entering formulas to complete four worksheets. The first objective is to
demonstrate the effect of different methods of accounting for the investments (equity, initial
value, and partial equity) on the parent company's trial balance and on the consolidated
worksheet subsequent to acquisition. The second objective is to show the effect on consolidated
balances and key financial ratios of recognizing a goodwill impairment loss.
The project requires preparation of the following four separate worksheets:
1.
2.
3.
4.
Consolidated information worksheet (follows).
Equity method consolidation worksheet.
Initial value method consolidation worksheet.
Partial equity method consolidation worksheet.
If your spreadsheet package has multiple worksheet capabilities (e.g., Excel), you can use
separate worksheets; otherwise, each of the four worksheets can reside in a separate area of a
single spreadsheet.
In formulating your solution, each worksheet should link directly to the first worksheet.
Also, feel free to create supplemental schedules to enhance the capabilities of your worksheet.
Project Scenario
Pecos Company acquired 100 percent of Suaro's outstanding stock for $1,450,000 cash on
January 1, 2012, when Suaro had the following balance sheet:
Assets
Liabilities and Equity
Cash
$ 37,000Liabilities
$(422,000)
Receivables
82,000
Inventory
149,000Common stock
(350,000)
Land
90,000Retained earnings
(126,000)
Equipment (net) 225,000
Software
315,000
Total assets
$898,000Total liabilities and equity$(898,000)
At the acquisition date, the fair values of each identifiable asset and liability that differed from
book value were as follows:
Land
$ 80,000
Brand name
60,000 (indefinite life—unrecognized on Suaro's books)
Software
415,000 (2-year estimated useful life)
In-process R&D 300,000
Additional Information

Although at acquisition date Pecos expected future benefits from Suaro's in-process
research and development (R&D), by the end of 2012, it became clear that the research
project was a failure with no future economic benefits.

During 2012, Suaro earns $75,000 and pays no dividends.

Selected amounts from Pecos and Suaro's separate financial statements at December 31,
2013, are presented in the consolidated information worksheet. All consolidated
worksheets are to be prepared as of December 31, 2013, two years subsequent to
acquisition.

Pecos's January 1, 2013, Retained Earnings balance—before any effect from Suaro's
2012 income—is $(930,000) (credit balance).

Pecos has 500,000 common shares outstanding for EPS calculations and reported
$2,943,100 for consolidated assets at the beginning of the period.
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Following is the consolidated information worksheet.
A
B
1 December 31, 2013, trial balances
2
3
Pecos
4 Revenues
($1,052,000)
5 Operating expenses
$ 821,000
6 Goodwill impairment loss
?
7 Income of Suaro
?
8 Net income
?
9
10 Retained earnings—Pecos 1/1/13
?
11 Retained earnings—Suaro 1/1/13
12 Net income (above)
?
13 Dividends paid
$ 200,000
C
Suaro
($427,000)
$262,000
($165,000)
($201,000)
($165,000)
$ 35,000
D
14 Retained earnings 12/31/13
15
16 Cash
17 Receivables
18 Inventory
19 Investment in Suaro
20
21
22
23 Land
24 Equipment (net)
25 Software
26 Other intangibles
27 Goodwill
28 Total assets
29
30 Liabilities
31 Common stock
32 Retained earnings (above)
33 Total liabilities and equity
34
35 Fair value allocation schedule
36 Price paid
37 Book value
38 Excess initial value
39 to land
40 to brand name
41 to software
42 to IPR&D
43 to goodwill
44
45 Suaro's RE changes
46 2012
47 2013
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Project Requirements
?
($331,000)
$ 195,000
$ 247,000
$ 415,000
?
$ 95,000
$143,000
$197,000
$ 341,000
$ 240,100
$ 85,000
$100,000
$312,000
$ 145,000
?
$932,000
($1,537,100)
($ 500,000)
?
?
($251,000)
($350,000)
($331,000)
($932,000)
$1,450,000
$ 476,000
$ 974,000 Amortizations
($ 10,000)
2012
2013
$ 60,000
?
?
$ 100,000
?
?
$ 300,000
?
?
$ 524,000
?
?
Income
$ 75,000
$ 165,000
Dividends
$0
$ 35,000
Complete the four worksheets as follows:
1. Input the consolidated information worksheet provided and complete the fair-value
allocation schedule by computing the excess amortizations for 2012 and 2013.
2. Using separate worksheets, prepare Pecos's trial balances for each of the indicated
accounting methods (equity, initial value, and partial equity). Use only formulas for the
Investment in Suaro, the Income of Suaro, and Retained Earnings accounts.
3. Using references to other cells only (either from the consolidated information
worksheet or from the separate method sheets), prepare for each of the three
consolidation worksheets:
o
Adjustments and eliminations.
o Consolidated balances.
4. Calculate and present the effects of a 2013 total goodwill impairment loss on the
following ratios for the consolidated entity:
o
Earnings per share (EPS).
o
Return on assets.
o
Return on equity.
o
Debt to equity.
Your worksheets should have the capability to adjust immediately for the possibility that
all acquisition goodwill can be considered impaired in 2013.
5. Prepare a word-processed report that describes and discusses the following
worksheet results:
1. The effects of alternative investment accounting methods on the parent's trial
balances and the final consolidation figures.
2. The relation between consolidated retained earnings and the parent's retained
earnings under each of the three (equity, initial value, partial equity) investment
accounting methods.
3. The effect on EPS, return on assets, return on equity, and debt-to-equity ratios of
the recognition that all acquisition-related goodwill is considered impaired in
2013.