Description
Use the following information for Problems 5-4 and 5-5:
On January 1, 2014, Pontiac Company acquired an 80% interest in the common stock of Stark Company for $400,000. Stark had the following balance sheet on the date of acquisition:
Stark Company Balance Sheet January 1, 2014 | |||
Assets |
| Liabilities and Equity |
|
Accounts receivable | $ 40,000 | Accounts payable | $ 42,297 |
Inventory | 20,000 | Bonds payable | 100,000 |
Land | 35,000 | Discount on bonds payable | (2,297) |
Buildings | 250,000 | Common stock ($10 par) | 10,000 |
Accumulated depreciation | (50,000) | Paid-in capital in excess of par | 90,000 |
Equipment | 120,000 | Retained earnings | 115,000 |
Accumulated depreciation | (60,000) |
| |
Total assets | $355,000 | Total liabilities and equity | $355,000 |
Buildings (20-year life) are undervalued by $80,000. Equipment (5-year life) is undervalued by $50,000. Any remaining excess is considered to be goodwill.
Stark issued $100,000 of 8%, 10-year bonds for $96,719 on January 1, 2011. Annual interest is paid on December 31. Pontiac purchased the bonds on January 1, 2015, for $104,770. Both companies use the straight-line method to amortize the premium/discount on the bonds. Pontiac and Stark used the following bond amortization schedules:
Stark | Pontiac | ||||||
Period | Cash | Interest | Balance | Period | Cash | Interest | Balance |
1/2011 | $ 96,719 | 1/2011 | |||||
1/2012 | $8,000 | $8,328 | 97,047 | 1/2012 | |||
1/2013 | 8,000 | 8,328 | 97,375 | 1/2013 | |||
1/2014 | 8,000 | 8,328 | 97,703 | 1/2014 | |||
1/2015 | 8,000 | 8,328 | 98,031 | 1/2015 | $104,770 | ||
1/2016 | 8,000 | 8,328 | 98,359 | 1/2016 | $8,000 | $7,205 | 103,975 |
1/2017 | 8,000 | 8,328 | 98,687 | 1/2017 | 8,000 | 7,205 | 103,180 |
1/2018 | 8,000 | 8,328 | 99,015 | 1/2018 | 8,000 | 7,205 | 102,385 |
1/2019 | 8,000 | 8,328 | 99,343 | 1/2019 | 8,000 | 7,205 | 101,590 |
1/2020 | 8,000 | 8,328 | 99,671 | 1/2020 | 8,000 | 7,205 | 100,795 |
1/2021 | 8,000 | 8,328 | 100,000* | 1/2021 | 8,000 | 7,205 | 100,000 |
*Adjusted for rounding
Problem 5-4 (LO 2) 80%, equity, straight-line bonds purchased this year, inventory profits.
Refer to the preceding facts for Pontiac’s acquisition of 80% of Starks common stock and the bond transactions. Pontiac uses the simple equity method to account for its investment in Stark. On January 1, 2015, Stack held merchandise acquired from Pontiac for $15,000. During 2015, Pontiac sold $50,000 worth of merchandise to Stark. Stark held $20,000 of this merchandise at December 31, 2015. Stark owed Pontiac $10,000 on December 31 as a result of these intercompany sales. Pontiac has a gross profit rate of 30%. Pontiac and Stark had the trial balances on December 31, 2015, shown on next page.
| Pontiac Company | Stark Company |
Cash | 17,870 | 32,031 |
Accounts Receivable | 90,000 | 60,000 |
Inventory | 100,000 | 30,000 |
Land | 150,000 | 45,000 |
Investment in Stark | 435,738 | |
Investment in Stark Bonds | 103,975 | |
Buildings | 500,000 | 250,000 |
Accumulated Depreciation | (300,000) | (70,000) |
Equipment | 200,000 | 120,000 |
Accumulated Depreciation | (100,000) | (84,000) |
Accounts Payable | (55,000) | (25,000) |
Bonds Payable | (100,000) | |
Discount on Bonds Payable | 1,641 | |
Common Stock | (100,000) | (10,000) |
Paid-In Capital in Excess of Par | (600,000) | (90,000) |
Retained Earnings, January 1, 2015 | (400,000) | (145,000) |
Sales | (600,000) | (220,000) |
Cost of Goods Sold | 410,000 | 120,000 |
Depreciation Expense—Buildings | 30,000 | 10,000 |
Depreciation Expense—Equipment | 15,000 | 12,000 |
Other Expenses | 109,360 | 45,000 |
Interest Revenue | (7,205) | |
Interest Expense | 8,328 | |
Subsidiary Income | (19,738) | |
Dividends Declared | 20,000 | 10,000 |
Totals | 0 | 0 |
Required
Prepare the worksheet necessary to produce the consolidated financial statements for Pontiac Company and its subsidiary Stark Company for the year ended December 31, 2015. Include the determination and distribution of excess and income distribution schedules.
Please see attached Excel spreadsheet to complete Problem 5-4
Unformatted Attachment Preview
Purchase answer to see full attachment
Explanation & Answer
Hello. Here is the complete solution. If you need any clarification I am here. Thank you.
SOLUTION
Determination and Distribution of Excess Schedule
Fair value of subsidiary....
Company
Parent
NCI
Implied
Price
Fair Value
(80%)
(20%)
$500,000
$400,000
$100,000
215,000
$215,000
Value
Less book value of interest acquired:
Total equity.................
$215,000
Interest acquired.........
80%
20%
Book value........................
$172,000
$ 43,000
$228,000
$ 57,000
Excess of fair value over book
value..........................
$285,000
Adjustment of identifiable accounts:
Worksheet
Adjustment
Amortization
Key
Life
per Year
Buildings.......................
$ 80,000
debit D1
20
$ 4,000
Equipment......................
50,000
debit D2
5
10,000
Goodwill....................
155,000
debit D3
Total......................
$285,000
Account Adjustments
to Be Amortized
Life
Annual
Current
Prior
Amount
Year
Years
Total
Key
Buildings......................... 20
$ 4,000
$ 4,000
$ 4,000
$ 8,000
(A1)
Equipment........................ 5
10,000
10,000
10,000
20,000
(A2)
$14,000
$14,000
$14,000
$28,000
Total amortizations....
Intercompany Inventory Profit Deferral
Parent
Parent
Parent
Sub
Amount
Percent
Profit
Amount
Sub
Percent
Sub
Profit
Beginning.......................
$15,000
Ending.............................. 20,000
30%
$4,500
—
0%
30
6,000
—
0
—
—
ANSWER CONTINUE TO NEXT PAGE
Subsidiary Stark Company Income Distribution
Lossonb on dretirement............... $ 6,739
Internally generated net
Buildings depreciation................... 4,000
Income..............................
$24,672
Interest adjustment—
Equipment depreciation................ 10,000
bonds.......
1,123
Adjusted income..............
$ 5,056
NCI share........................
×
NCI................................
20%
$ 1,011
Parent Pontiac Company Income Distribution
Ending inventory profit..............
$6,000
Internally generated net
income...........................
$42,845
80% share of Stark
adjusted income of $5,056
4,045
Beginning inventory profit
4,500
Controlling interest.........
Proof for Bond Elimination
Loss remaining at year-end:
Investment in bonds at December 31, 2015
.....................
$103,975
$45,390
Carrying value at December 31, 2015...............
98,359
$5,616
Loss amortized during the year:
Interest expense eliminated...
Interest revenue eliminated......
LossatJanuary1, 2015.........
$ 8,328
7,205
1,123
$6,739
ANSWER CONTINUE TO NEXT PAGE
Eliminations and Adjustments:
(CY1)
Current-year subsidiary income
(CY2)
Current-year dividend
(EL)
Eliminate controlling interest in subsidiary equity.
(D)/(NCI)
Distribute excess and NCI adjustment.
(A1)
Amortize excess—buildings.
(A2)
Amortize excess—equipment.
(IS)
Eliminate intercompany sale during current period.
(IA)
Eliminate intercompany unpaid trade accounts.
(BI)
Defer beginning inventory profit.
(EI)
Defer ending inventory profit.
(B)
Eliminate intercompany bonds.
Here is the excel. Thank you
Name of Company Being Acquired
Stark company
Name of Acquiring Company
Pontiac Company
Date of Acquisition
Date of Acquisition Stark company
Book
Market
Assets
Cash
Accounts Receivable
Inventory
Investment in Subsidiary
Intercompany Bond Investment
January 1,2011
Life
40,000
20,000
40,000
20,000
Land
Buildings
Accumulated Depreciation
Equipment
Accumulated Depreciation
Goodwill
Total Assets
Liabilities
Accounts Payable
Bonds Payable
Discount on Bonds Payable
Total Liabilities
Equity Acquired Company Common Stock
Paid-in Capital in Excess of Par
Retained Earnings
Equity Acquiring Company Common Stock
Paid-in Capital in Excess of Par
Retained Earnings Total Equity
Total Liabilities and Equity
Net Assets at Market of Acquired Co.
Dividends Declared Acquired Company Dividends Declared Acquiring Company Sales
Cost of Goods Sold
Depreciation Expense of
Buildings
Equipment
Amortization Expense of
Other Expenses Interest Expense
Gain on Sale of Intercompany Asset Interest Revenue
Subsidiary Income
Total
Balances
Purchase Price
Cash
350,000
Number of shares exchanged Par value of a share of stock Market value of a share of stock
Market value of stock exchanged
Total purchase price
400,000
Ownership Interest enter as .7 for 70%
0.80
Goodwill Applicable to NCI
Implied Value of NCI Interest
100,000.00
Estimated Value of NCI interest if not the implied proportional amount--Enter
amount or 0
Method of Accounting for Investment-Enter Capital C for Cost or Capital E for Equity
E
Years since Acquisition
2.00
Intercompany Merchandise Information
Parent Sales
Parent %
Current Year Sales
50,000
Unpaid Account Balance, at year end
10,000
Beginning Inventory
15,000
0.30
Ending Inventory
20,000
0.30
Subsidiary
Sales
Intercompany Fixed Asset Sales
Type of Fixed Asset--Enter in Columns B or C
Enter 1 for
Land
Enter 2 for
Buildings
Enter 3 for
Equipment
By Parent
By Sub
Profit Amount
Life of Asset--leave blank for land
Year of Sale (Assume Beginning of Year)
Intercompany Bond Information
Maturity Value
100000
Face Interest Rate (Enter .08 for 8%,.075 for
7.5%)
0.08
Original Years to Maturity...