Herbert, Inc., acquired all of Rambis Company’s

| September 28, 2018

(1).
Herbert, Inc., acquired all of Rambis Company’s outstanding stock on January 1,
2012, for $574,000 in cash. Annual excess amortization of $12,000 results from
this transaction. On the date of the takeover, Herbert reported retained
earnings of $400,000, and Rambis reported a $200,000 balance. Herbert reported
internal income of $40,000 in 2012 and $50,000 in 2013 and paid $10,000 in
dividends each year. Rambis reported net income of $20,000 in 2012 and $30,000
in 2013 and paid $5,000 in dividends each year.
a.
Assume that Herbert’s internal income
figures above do not include any income from the subsidiary.

If the parent uses the equity method, what is the amount reported as
consolidated retained earnings on December 31, 2013?

Would the amount of consolidated retained earnings change if the parent had
applied either the initial value or partial equity method for internal
accounting purposes?
b.
Under each of the following situations,
what is the Investment in Rambis account balance on Herbert’s books on January
1, 2013?

The parent uses the equity method.

The parent uses the partial equity method.

The parent uses the initial value method.
c.
Under each of the following situations,
what is Entry *Con a 2013 consolidation worksheet?

The parent uses the equity method.

The parent uses the partial equity method.

The parent uses the initial value method.

(2)
The Krause Corporation acquired 80 percent of the 100,000 outstanding voting
shares of Leahy, Inc., for $6.30 per share on January 1, 2012. The remaining 20
percent of Leahy’s shares also traded actively at $6.30 per share before and
after Krause’s acquisition. An appraisal made on that date determined that all
book values appropriately reflected the fair values of Leahy’s underlying accounts
except that a building with a 5-year life was undervalued by $45,000 and a
fully amortized trademark with an estimated 10-year remaining life had a
$60,000 fair value
At
the acquisition date, Leahy reported common stock of $100,000 and retained earnings
balance of $280,000.
Following are
the separate financial statements for the year ending December 31, 2013:
Krause
Corporation Leahy, Inc.
Sales . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .. $ (584,000) $(250,000)
Cost of goods sold
. . . . . . . . . . . . . . . . . . . . . 194,000 95,000
Operating
expenses . . . . . . . . . . . . . . . . . . . . . 246,000 65,000
Dividend income
. . . . . . . . . . . . . . . . . . . . .
. (16,000) –0–
Net income . . .
. . . . . . . . . . . . . . . . . . .. . . . $ (160,000) $ (90,000)
Retained
earnings, 1/1/13 . . . . . . . . . . . .. . . $ (700,000) $(350,000)
Net income
(above) . . . . . . . . . . . . . . . . . .. . . (160,000) (90,000)
Dividends paid .
. . . . . . . . . . . . . . . . . . . . . . . . 70,000 20,000
Retained
earnings, 12/31/13 . . . . . . . . . . . . . $ (790,000) $(420,000)
Current assets .
. . . . . . . . . . . . . . . . . . . . . . . $ 296,000 $
191,000
Investment in
Leahy, Inc. . . . . . . . . . . . . . . .
. 504,000 –0–
Buildings and
equipment (net) . . . . . . . . . . .. . 680,000 390,000
Trademarks . . .
. . . . . . . . . . . . . . . . . . . . . . . . 100,000 144,000
Total assets . .
. . . . . . . . . . . . . . . . . . . . . . . $ 1,580,000 $ 725,000
Liabilities . .
. . . . . . . . . . . . . . . . . . . . . . . . $ (470,000) $(205,000)
Common stock . .
. . . . . . . . . . . . . . . . . . . .
. (320,000) (100,000)
Retained
earnings, 12/31/13 (above) . . . . .. . (790,000) (420,000)
Total
liabilities and equities . . . . . . . . . .
. $(1,580,000)
$(725,000)

a.Prepare
a worksheet to consolidate these two companies as of December 31, 2013.
b.Prepare
a 2013 consolidated income statement for Krause and Leahy.
c.If
instead the non-controlling interest shares of Leahy had traded for $4.85
surrounding
Krause’s
acquisition date, how would the consolidated statements change?

(3)
Parker, Inc., acquires 70 percent of Sawyer Company for $420,000. The remaining
30 percent of Sawyer’s outstanding shares continue to trade at a collective
value of $174,000. On the acquisition date, Sawyer has the following accounts:
Book
Value Fair Value
Current
assets . . . . . . . . . . . . . . . . . . . . . . . . . $ 210,000 $ 210,000
Land
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170,000 180,000
Buildings
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000 330,000
Liabilities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (280,000) (280,000)
The
buildings have a 10-year life. In addition, Sawyer holds a patent worth
$140,000 that has a five-year life but is not recorded on its financial
records. At the end of the year, the two companies report the following
balances:
Parker
Sawyer
Revenues
. . . . . . . . . . . . . . . . . . . . . . . . . .. $(900,000)
$(600,000)
Expenses
. . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 400,000

a.
Assume that the acquisition took place
on January 1. What figures would appear in a consolidated income statement for
this year?
b.
Assume that the acquisition took place
on April 1. Sawyer’s revenues and expenses occurred uniformly throughout the year.
What amounts would appear in a consolidated income statement for this year?

(4)
Placid Lake Corporation acquired 80 percent of the outstanding voting stock of
Scenic, Inc., on January 1, 2012, when Scenic had a net book value of $400,000.
Any excess fair value was assigned to intangible assets and amortized at a rate
of $5,000 per year.
Placid Lake’s
2013 net income before consideration of its relationship with Scenic (and
before adjustments for intra-entity sales) was $300,000. Scenic reported net income
of $110,000.
Placid Lake
distributed $100,000 in dividends during this period; Scenic paid $40,000. At
the end of 2013, selected figures from the two companies’ balance sheets were
as follows:

Placid Lake Scenic
Inventory . . .
. . . . . . . . . . . . . . . . . . . . .. . . . . $140,000 $ 90,000
Land. . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 200,000
Equipment (net)
. . . . . . . . . . . . . . . . . . . . . . . . 400,000 300,000

During 2012,
intra-entity sales of $90,000 (original cost of $54,000) were made. Only
20 percent of
this inventory was still held within the consolidated entity at the end of
2012. In
2013, $120,000
in intra-entity sales were made with an original cost of $66,000. Of this
merchandise, 30 percent had not been resold to outside parties by the end of
the year.
Each of the
following questions should be considered as an independent situation for the year
2013.
a.What
is consolidated net income for Placid Lake and its subsidiary?
b.If
the intra-entity sales were upstream, how would consolidated net income be
allocated to the controlling and non-controlling interest?
c.If
the intra-entity sales were downstream, how would consolidated net income be
allocated to the controlling and non-controlling interest?
d.What
is the consolidated balance in the ending Inventory account?
e.Assume
that no intra-entity inventory sales occurred between Placid Lake and Scenic.
Instead, in 2012, Scenic sold land costing $30,000 to Placid Lake for $50,000.
On the 2013 consolidated balance sheet, what value should be reported for land?
f.Assume
that no intra-entity inventory or land sales occurred between Placid Lake and
Scenic.
Instead, on
January 1, 2012, Scenic sold equipment (that originally cost $100,000 but had a
$60,000 book value on that date) to Placid Lake for $80,000. At the time of
sale, the equipment had a remaining useful life of five years. What worksheet
entries are made for a December 31, 2013, consolidation of these two companies
to eliminate the impact of the intra-entity transfer? For 2013, what is the non-controlling
interest’s share of Scenic’s net income?

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