Problem 3-38 (LO 3-4, 3-6)
On January 1, Prine, Inc., acquired 100 percent of Lydia Company’s common stock for a fair value of $130,869,000 in cash and stock. Lydia’s assets and liabilities equaled their fair values except for its equipment, which was undervalued by $690,000 and had a 10-year remaining life.
Prine specializes in media distribution and viewed its acquisition of Lydia as a strategic move into content ownership and creation. Prine expected both cost and revenue synergies from controlling Lydia’s artistic content (a large library of classic movies) and its sports programming specialty video operation. Accordingly, Prine allocated Lydia’s assets and liabilities (including $55,551,000 of goodwill) to a newly formed operating segment appropriately designated as a reporting unit.
The fair values of the reporting unit’s identifiable assets and liabilities through the first year of operations were as follows.
| Fair Values | ||||||
| Account | 1/1 | 12/31 | ||||
| Cash | $ | 282,000 | $ | 327,500 | ||
| Receivables (net) | 542,000 | 935,000 | ||||
| Movie library (25-year remaining life) | 44,200,000 | 69,520,000 | ||||
| Broadcast licenses (indefinite remaining life) | 15,710,000 | 21,090,000 | ||||
| Equipment (10-year remaining life) | 21,430,000 | 19,940,000 | ||||
| Current liabilities | (566,000 | ) | (842,500 | ) | ||
| Long-term debt | (6,280,000 | ) | (6,400,000 | ) | ||
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However, Lydia’s assets have taken longer than anticipated to produce the expected synergies with Prine’s operations. Accordingly, Prine reviewed events and circumstances and concluded that Lydia’s fair value was likely less than its carrying amount. At year-end, Prine reduced its assessment of the Lydia reporting unit’s fair value to $121,840,000.
At December 31, Prine and Lydia submitted the following balances for consolidation. There were no intra-entity payables on that date.
| Prine, Inc. | Lydia Co. | |||||
| Revenues | $ | (23,400,000 | ) | $ | (16,400,000 | ) |
| Operating expenses | 15,700,000 | 15,000,000 | ||||
| Equity in Lydia earnings | (1,331,000 | ) | ||||
| Dividends declared | 300,000 | 150,000 | ||||
| Retained earnings, 1/1 | (68,900,000 | ) | (7,128,000 | ) | ||
| Cash | 671,000 | 327,500 | ||||
| Receivables (net) | 410,000 | 935,000 | ||||
| Investment in Lydia | 132,050,000 | |||||
| Broadcast licenses | 527,500 | 14,900,000 | ||||
| Movie library | 367,500 | 49,700,000 | ||||
| Equipment (net) | 142,000,000 | 17,700,000 | ||||
| Current liabilities | (795,000 | ) | (134,500 | ) | ||
| Long-term debt | (22,600,000 | ) | (7,550,000 | ) | ||
| Common stock | (175,000,000 | ) | (67,500,000 | ) | ||
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- What is the relevant initial test to determine whether goodwill could be impaired?
- At what amount should Prine record an impairment loss for its Lydia reporting unit for the year?
- What is consolidated net income for the year?
- What is the December 31 consolidated balance for goodwill?
- What is the December 31 consolidated balance for broadcast licenses?
Prepare a consolidated worksheet for Prine and Lydia (Prine’s trial balance should first be adjusted for any appropriate impairment loss).
Problem 3-28 (LO 3-1, 3-3a)
Patrick Corporation acquired 100 percent of O’Brien Company’s outstanding common stock on January 1, for $626,000 in cash. O’Brien reported net assets with a carrying amount of $360,000 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 |
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| Trademarks (indefinite life) | $ | 66,000 | $ | 206,000 |
| Customer relationships (5-year remaining life) | 0 | 83,400 | ||
| Equipment (10-year remaining life) | 417,000 | 384,600 | ||
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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. O’Brien declared and paid dividends in the same period. Credit balances are indicated by parentheses.
| Patrick | O’Brien | ||||||
| Revenues | $ | (1,192,500 | ) | $ | (776,000 | ) | |
| Cost of goods sold | 318,000 | 356,000 | |||||
| Depreciation expense | 91,500 | 92,400 | |||||
| Amortization expense | 28,400 | 0 | |||||
| Income from O’Brien | (314,160 | ) | 0 | ||||
| Net income | $ | (1,068,760 | ) | $ | (327,600 | ) | |
| Retained earnings 1/1 | $ | (786,000 | ) | $ | (251,000 | ) | |
| Net income | (1,068,760 | ) | (327,600 | ) | |||
| Dividends declared | 143,000 | 81,000 | |||||
| Retained earnings 12/31 | $ | (1,711,760 | ) | $ | (497,600 | ) | |
| Cash | $ | 207,000 | $ | 114,500 | |||
| Receivables | 370,000 | 76,200 | |||||
| Inventory | 188,000 | 169,000 | |||||
| Investment in O’Brien | 850,160 | 0 | |||||
| Trademarks | 498,000 | 75,900 | |||||
| Customer relationships | 0 | 0 | |||||
| Equipment (net) | 978,000 | 283,000 | |||||
| Goodwill | 0 | 0 | |||||
| Total assets | $ | 3,091,160 | $ | 718,600 | |||
| Liabilities | $ | (979,400 | ) | $ | (121,000 | ) | |
| Common stock | (400,000 | ) | (100,000 | ) | |||
| Retained earnings 12/31 | (1,711,760 | ) | (497,600 | ) | |||
| Total liabilities and equity | $ | (3,091,160 | ) | $ | (718,600 | ) | |
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Which investment method did Patrick use to compute the $314,160 income from O’Brien?
Determine the totals to be reported for this business combination for the year ending December 31.
Verify the totals determined in part (b) by producing a consolidation worksheet for Patrick and O’Brien for the year ending December 31.
Question 3
Milani, Inc., acquired 10 percent of Seida Corporation on January 1, 2017, for $197,000 and appropriately accounted for the investment using the fair-value method. On January 1, 2018, Milani purchased an additional 30 percent of Seida for $688,000 which resulted in significant influence over Seida. On that date, the fair value of Seida’s common stock was $2,090,000 in total. Seida’s January 1, 2018 book value equaled $1,940,000, although land was undervalued by $130,000. Any additional excess fair value over Seida’s book value was attributable to a trademark with an 8-year remaining life. During 2018, Seida reported income of $288,000 and declared and paid dividends of $116,000. Prepare the 2018 journal entries for Milani related to its investment in Seida.(If no entry is required for a transaction/event, select “No journal entry required” in the first account field.)
- Record acquisition of Seida stock.
- Record income for the year: 40% of the $288,000 reported income.
- Record 2018 amortization for trademark excess fair value.
- Record dividend declaration from Seida.
- Record collection of dividend from investee.
Question 4Problem 2-34 (LO 2-4, 2-5, 2-6b, 2-6c, 2-7)
On December 31, Pacifica, Inc., acquired 100 percent of the voting stock of Seguros Company. Pacifica will maintain Seguros as a wholly owned subsidiary with its own legal and accounting identity. The consideration transferred to the owner of Seguros included 61,715 newly issued Pacifica common shares ($20 market value, $5 par value) and an agreement to pay an additional $130,000 cash if Seguros meets certain project completion goals by December 31 of the following year. Pacifica estimates a 50 percent probability that Seguros will be successful in meeting these goals and uses a 4 percent discount rate to represent the time value of money.
Immediately prior to the acquisition, the following data for both firms were available:
| Pacifica | Seguros Book Values | Seguros Fair Values | |||||||||
| Revenues | $ | (1,980,000 | ) | ||||||||
| Expenses | 1,386,000 | ||||||||||
| Net income | $ | (594,000 | ) | ||||||||
| Retained earnings, 1/1 | $ | (1,007,000 | ) | ||||||||
| Net income | (594,000 | ) | |||||||||
| Dividends declared | 104,000 | ||||||||||
| Retained earnings, 12/31 | $ | (1,497,000 | ) | ||||||||
| Cash | $ | 168,000 | $ | 86,000 | $ | 86,000 | |||||
| Receivables and inventory | 396,000 | 162,000 | 151,700 | ||||||||
| Property, plant, and equipment | 1,980,000 | 540,000 | 713,000 | ||||||||
| Trademarks | 354,000 | 250,000 | 301,600 | ||||||||
| Total assets | $ | 2,898,000 | $ | 1,038,000 | |||||||
| Liabilities | $ | (526,000 | ) | $ | (262,000 | ) | $ | (262,000 | ) | ||
| Common stock | (400,000 | ) | (200,000 | ) | |||||||
| Additional paid-in capital | (475,000 | ) | (70,000 | ) | |||||||
| Retained earnings | (1,497,000 | ) | (506,000 | ) | |||||||
| Total liabilities and equities | $ | (2,898,000 | ) | $ | (1,038,000 | ) | |||||
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In addition, Pacifica assessed a research and development project under way at Seguros to have a fair value of $186,000. Although not yet recorded on its books, Pacifica paid legal fees of $22,700 in connection with the acquisition and $11,400 in stock issue costs.
a. Prepare Pacifica’s entries to account for the consideration transferred to the former owners of Seguros, the direct combination costs, and the stock issue and registration costs.
b.&c. Present a worksheet showing the postacquisition column of accounts for Pacifica and the consolidated balance sheet as of the acquisition date.
Problem 2-33 (LO 2-4, 2-5, 2-6a, 2-6b, 2-6c, 2-7, 2-8)
On January 1, NewTune Company exchanges 17,543 shares of its common stock for all of the outstanding shares of On-the-Go, Inc. Each of NewTune’s shares has a $4 par value and a $50 fair value. The fair value of the stock exchanged in the acquisition was considered equal to On-the-Go’s fair value. NewTune also paid $33,400 in stock registration and issuance costs in connection with the merger.
Several of On-the-Go’s accounts’ fair values differ from their book values on this date:
| Book Values | Fair Values | ||||||
| Receivables | $ | 57,750 | $ | 54,700 | |||
| Trademarks | 109,250 | 257,000 | |||||
| Record music catalog | 81,750 | 274,500 | |||||
| In-process research and development | 0 | 216,000 | |||||
| Notes payable | (58,000 | ) | (48,900 | ) | |||
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Precombination book values for the two companies are as follows:
| NewTune | On-the-Go | ||||||
| Cash | $ | 68,500 | $ | 37,750 | |||
| Receivables | 134,500 | 57,750 | |||||
| Trademarks | 415,000 | 109,250 | |||||
| Record music catalog | 885,000 | 81,750 | |||||
| Equipment (net) | 330,000 | 112,000 | |||||
| Totals | $ | 1,833,000 | $ | 398,500 | |||
| Accounts payable | $ | (189,000 | ) | $ | (54,000 | ) | |
| Notes payable | (431,000 | ) | (58,000 | ) | |||
| Common stock | (400,000 | ) | (50,000 | ) | |||
| Additional paid-in capital | (30,000 | ) | (30,000 | ) | |||
| Retained earnings | (783,000 | ) | (206,500 | ) | |||
| Totals | $ | (1,833,000 | ) | $ | (109,250 | ) | |
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- A. Assume that this combination is a statutory merger so that On-the-Go’s accounts will be transferred to the records of NewTune. On-the-Go will be dissolved and will no longer exist as a legal entity. Prepare a postcombination balance sheet for NewTune as of the acquisition date.
- B. Assume that no dissolution takes place in connection with this combination. Rather, both companies retain their separate legal identities. Prepare a worksheet to consolidate the two companies as of the combination date.
Problem 1-28 (LO 1-3, 1-4, 1-5b 1-6)
Harper, Inc. acquires 40 percent of the outstanding voting stock of Kinman Company on January 1, 2017, for $251,800 in cash. The book value of Kinman’s net assets on that date was $450,000, although one of the company’s buildings, with a $62,400 carrying amount, was actually worth $108,900. This building had a 10-year remaining life. Kinman owned a royalty agreement with a 20-year remaining life that was undervalued by $133,000.
Kinman sold inventory with an original cost of $58,800 to Harper during 2017 at a price of $84,000. Harper still held $24,300 (transfer price) of this amount in inventory as of December 31, 2017. These goods are to be sold to outside parties during 2018.
Kinman reported a $55,400 net loss and a $29,800 other comprehensive loss for 2017. The company still manages to declare and pay a $5,000 cash dividend during the year.
During 2018, Kinman reported a $51,000 net income and declared and paid a cash dividend of $7,000. It made additional inventory sales of $70,000 to Harper during the period. The original cost of the merchandise was $43,750. All but 30 percent of this inventory had been resold to outside parties by the end of the 2018 fiscal year.
Prepare all journal entries for Harper for 2017 and 2018 in connection with this investment. Assume that the equity method is applied. (If no entry is required for a transaction/event, select “No journal entry required” in the first account field. Do not round intermediate calculations.)
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