5. On January 1, 20X1, Panther Company purchased 100% of the common stock of Seahawk Company for $1,410,000. On this date, Seahawk had total owners’ equity of $1,150,000.
On December 31, 20X4, Seahawk Company had reported an operating loss before taxes of $175,000. Assume a tax rate of 35%. Since a carryback of $75,000 was available, a tax refund receivable of $26,250 was recorded and a net-of-tax loss of $148,750 was reported. At the date of purchase, Panther Company has concluded that the balance of the tax benefit of the operating loss will be realized in 20X1 when a consolidated tax return is prepared.
On January 1, 20X1, the excess of cost over book value is due to the tax benefit above, to a $30,000 undervaluation of Bonds Payable, to an undervaluation of land, building and equipment, and to goodwill. The fair value of land is $500,000. The fair value of building and equipment is $750,000. The book value of the land is $400,750. The book value of the building and equipment is $613,000.
2-12
Chapter 2
Required:
a. Using the information above and on the separate worksheet, complete a schedule for determination and distribution of the excess of cost over book value.
b. Complete the Figure 2-3 worksheet for a consolidated balance sheet as of January 1, 20X1.
6. On January 1, 20X1, Parent Company purchased 80% of the common stock of Subsidiary Company for $248,800. On this date, Subsidiary had total owners’ equity of $240,000.
On December 31, 20X4, Subsidiary Company had reported an operating loss before taxes of $40,000. Assume a tax rate of 30%. Since a carryback of $20,000 was available, a tax refund receivable of $6,000 was recorded and a net-of-tax loss of $34,000 was reported. At the date of purchase, Parent Company has concluded that the balance of the tax benefit of the operating loss will be realized in 20X1 when a consolidated tax return is prepared.
On January 1, 20X1, the excess of cost over book value is due to the tax benefit above, to a $5,000 undervaluation of Bonds Payable, to an undervaluation of land, building and equipment, and to goodwill. The fair value of land is $40,000. The fair value of building and equipment is $200,000. The book value of the land is $30,000. The book value of the building and equipment is $180,000.
Required:
a. From the information above and on the separate worksheet, complete a schedule for determination and distribution of the excess of cost over book value. Use the parent company concept (pro rata fair value approach) in any revaluation of net assets.
b. Complete the Figure 2-4 worksheet for a consolidated balance sheet as of January 1, 20X1.
2-14
Chapter 2
7. On January 1, 20X1, Parent Company purchased 100% of the common stock of Subsidiary Company for $280,000. On this date, Subsidiary had total owners’ equity of $240,000.
On January 1, 20X1, the excess of cost over book value is due to a $15,000 undervaluation of inventory, to a $5,000 overvaluation of Bonds Payable, and to an undervaluation of land, building and equipment. The fair value of land is $50,000. The fair value of building and equipment is $200,000. The book value of the land is $30,000. The book value of the building and equipment is $180,000.
Required:
a. Using the information above and on the separate worksheet, complete a schedule for determination and distribution of the excess of cost over book value.
b. Complete the Figure 2-5 worksheet for a consolidated balance
2-15
Chapter 2
sheet as of January 1, 20X1.
2-16
Chapter 2
8. On January 1, 20X1, Parent Company purchased 90% of the common stock of Subsidiary Company for $252,000. On this date, Subsidiary had total owners’ equity of $240,000.
On January 1, 20X1, the excess of cost over book value is due to a $15,000 undervaluation of inventory, to a $5,000 overvaluation of Bonds Payable, and to an undervaluation of land, building and equipment. The fair value of land is $50,000. The fair value of building and equipment is $200,000. The book value of the land is $30,000. The book value of the building and equipment is $180,000.
Required:
a. From the information above and on the separate worksheet, complete a schedule for determination and distribution of the excess of cost over book value. Use the parent company concept (pro rata fair value approach) in any revaluation of net assets.
b. Complete the Figure 2-6 worksheet for a consolidated balance sheet as of January 1, 20X1.
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Chapter 2
ANS:
a. Determination and Distribution of Excess of Cost Over Book Value Schedule:
| Price paid for investment in Subsidiary | $252,000 | ||||||||||||||||||||
| Company……………………….. | |||||||||||||||||||||
| Less book value of interest acquired: | |||||||||||||||||||||
| Common Stock…………………… | $ 50,000 | ||||||||||||||||||||
| Other Paid-in Capital…………… | 70,000 | ||||||||||||||||||||
| Retained Earnings………………. | 120,000 | ||||||||||||||||||||
| Total ………………………… | $240,000 | 216,000 | |||||||||||||||||||
| Less Interest acquired | ………….. | 90% | |||||||||||||||||||
| Excess of cost over book value | $ 36,000 | ||||||||||||||||||||
| (debit balance)………………… | |||||||||||||||||||||
| ======== | |||||||||||||||||||||
| Allocable to: | $13,500 Dr. | ||||||||||||||||||||
| Inventory ($15,000 x 90%)………… | |||||||||||||||||||||
| Discount on bonds payable | 4,500 | Dr. | |||||||||||||||||||
| ($5,000 x 90%)…………………. | |||||||||||||||||||||
| Remainder to other long-lived assets: | $18,000 | Dr. | |||||||||||||||||||
| Land………………………….. | 14,400 | ||||||||||||||||||||
| Building………………………. | 3,600 | Dr. | |||||||||||||||||||
| ……………………….Goodwill | $ | 0 | |||||||||||||||||||
| ======= | |||||||||||||||||||||
| Alternative 1 | 100% of Fraction | Total | Allocated | 100% of | |||||||||||||||||
| Asset | Fair | of Fair | Assigned | Assigned | Book | ||||||||||||||||
| Value | Value | Value* | Value | Value _ | |||||||||||||||||
| Land…….. | $ 50,000 | 1/5 | $230,000 | $ 46,000 | $ 30,000 | ||||||||||||||||
| Building…. | 200,000 | 4/5 | 230,000 | 184,000 | 180,000 | ||||||||||||||||
| $250,000 | $230,000 | $210,000 | |||||||||||||||||||
| ======== | ======== | ======== | |||||||||||||||||||
| Alternative 1 continued | 90% | ||||||||||||||||||||
| 100% | |||||||||||||||||||||
| Asset | Increase | Increase | |||||||||||||||||||
| (Decrease) | (Decrease) | ||||||||||||||||||||
| Land…….. | $16,000 | $14,400 | |||||||||||||||||||
| Building…. | 4,000 | 3,600 | |||||||||||||||||||
| $20,000 | $18,000 | ||||||||||||||||||||
| ======= | ======= |
* If remaining allocable cost on a 90% purchase is $18,000, it would be $20,000 on a 100% purchase. Book value of $210,000 must be increased by $20,000 to get total allocable cost. Increase of decrease for 100% purchase must then be multiplied by 90% to derive correct writeup.
2-18
| Chapter 2 | ||||||||||||
| Alternative 2 | Fraction | Total | Allocated | 90% of | 90% | |||||||
| 90% of | ||||||||||||
| Asset | Fair | of Fair | Assigned | Assigned | Book | Increase | ||||||
| Value | Value | Value** | Value | Value | (Decrease) | |||||||
| Land | $ 45,000 | 1/5 | $207,000 | $ 41,400 | $ 27,000 | $14,400 | ||||||
| Building | 180,000 | 4/5 | 207,000 | 165,600 | 162,000 | 3,600 | ||||||
| $225,000 | $207,000 | $189,000 | $18,000 | |||||||||
| ======== | ======== | ======== | ======= |
** The remaining allocable cost on a 90% purchase is $18,000. The book value of the controlling interest in land and building is $189,000 (90% of $210,000). This book value of $189,000 must be increased by $18,000 to get the total assigned value.
b. For the worksheet solution, please refer to Answer 2-6. Eliminations and Adjustments:
(EL) Eliminate 90% of the subsidiary’s equity accounts against the investment in subsidiary account.
(D) Allocate the excess of cost over book value to net assets as required by the determination and distribution of excess schedule.
DIF: D OBJ: 4, 5, 6, 7, 8
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Chapter 2
| 9. | Consolidated | |||||||||
| Pepper Co. | Salt Inc. | Financial | ||||||||
| Cash | Statements | |||||||||
| $ 26,000 | $ 20,000 | $ 46,000 | ||||||||
| Accounts Receivable, net | 20,000 | 30,000 | 50,000 | |||||||
| Inventory | 125,000 | 110,000 | 270,000 | |||||||
| Land | 30,000 | 80,000 | 124,000 | |||||||
| Building and Equipment | 320,000 | 160,000 | 459,000 | |||||||
| Investment in Subsidiary | 279,000 | – | – | |||||||
| Goodwill | – | – | 41,000 | |||||||
| Total Assets | $800,000 | $400,000 | $990,000 | |||||||
| ======== | ======== | ======== | ||||||||
| Accounts Payable | $ 40,000 | $ 40,000 | $ 80,000 | |||||||
| Other Liabilities | 70,000 | 60,000 | 130,000 | |||||||
| Common Stock | 400,000 | 200,000 | 400,000 | |||||||
| Retained Earnings | 290,000 | 100,000 | 290,000 | |||||||
| Noncontrolling Interest | – | – | 90,000 | |||||||
| Total Liabilities & | $800,000 | $400,000 | $990,000 | |||||||
| Stockholders’ Equity | ||||||||||
| ======== | ======== | ======== |
Answer the following based upon the above financial statements:
a. How much did Pepper Co. pay to acquire Salt Inc.?
b. What percentage ownership did Pepper Co. acquire of Salt Inc.?
c. What was the fair value of Salt’s Inventory at the time of acquisition?
d. Was the book value of Salt’s Building and Equipment overvalued or undervalued relative to the Building and Equipment’s fair value at the time of acquisition?
Chapter 2
10. On January 1, 20X1, Parent Company acquired 80% of the common stock of Subsidiary Company by issuing Parent common stock with a fair value of $250,800. On this date, Subsidiary had total owners’ equity of $240,000.
Even though the combination must be accounted for as a purchase, it is a tax-free combination for Federal income tax purposes. The corporate tax rate is 30%.
On January 1, 20X1, the excess of cost over book value is due to an undervaluation of land, building, and goodwill. The fair value of land is $40,000. The fair value of building is $200,000. The book value of the land is $30,000. The book value of the building is $180,000.
Required:
a. From the information above and on the separate worksheet, complete a schedule for determination and distribution of the excess of cost over book value. Use the parent company concept (prorata fair value approach) in any writeup of net assets.
b. Complete the Figure 2-7 worksheet for a consolidated balance sheet as of January 1, 20X1.
2-21
Chapter 2
2-22
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