Question

On January 1, 2018, Brooks Corporation exchanged $1,177,000 fair-value consideration for all of the outstanding voting stock of Chandler, Inc. At the acquisition date, Chandler had a book value equal to $1,100,000. Chandler’s individual assets and liabilities had fair values equal to their respective book values except for the patented technology account, which was undervalued by $252,000 with an estimated remaining life of six years. The Chandler acquisition was Brooks’s only business combination for the year.

In case expected synergies did not materialize, Brooks Corporation wished to prepare for a potential future spin-off of Chandler, Inc. Therefore, Brooks had Chandler maintain its separate incorporation and independent accounting information system as elements of continuing value.

On December 31, 2018, each company submitted the following financial statements for consolidation. Dividends were declared and paid in the same period.

	Brooks Corp.				Chandler Inc.
Income Statement
Revenues	$	(658,000	)		$	(618,000	)
Cost of goods sold		225,000				242,000
Gain on bargain purchase		(175,000	)			0
Depreciation and amortization		149,000				158,000
Equity earnings from Chandler		(176,000	)			0
Net income	$	(635,000	)		$	(218,000	)
Statement of Retained Earnings
Retained earnings, 1/1	$	(1,825,000	)		$	(800,000	)
Net income (above)		(635,000	)			(218,000	)
Dividends declared		250,000				30,000
Retained earnings, 12/31	$	(2,210,000	)		$	(988,000	)
Balance Sheet
Current assets	$	220,000			$	394,000
Investment in Chandler		1,498,000				0
Trademarks		170,000				254,000
Patented technology		376,000				447,000
Equipment		668,000				320,000
Total assets	$	2,932,000			$	1,415,000
Liabilities	$	(187,000	)		$	(127,000	)
Common stock		(535,000	)			(300,000	)
Retained earnings, 12/31		(2,210,000	)			(988,000	)
Total liabilities and equity	$	(2,932,000	)		$	(1,415,000	)

Note: Parentheses indicate a credit balance.

a. Determine the following account balances:

• Gain on bargain purchase.
• Earnings from Chandler.
• Investment in Chandler.

b. Prepare a December 31, 2018, consolidated worksheet for Brooks and Chandler.

Answer 1

a) Determine the following Balances 1,177,000 Gain of Bargain Purchase Consideration transferred by Brook's Corporation Less: Acquisition of Fair value of Chandler's Chandler's Book Value Undervalued patent Total Acquired fair value of Chandler's Gain of Bargain Purchase 1,100,000 252,000 (1,352,000) (175,000) Earnings from Chandler Net Income of Chandler Less: Amortization of Patent Equity Earnings from Chandler 218,000 (42,000) 176,000 Investment in Chandler 12/31/18 Fair value assets acquired Equity Earnings from Chandler Less: Dividend declared by Chanlder Investment in Chandler 12/31/18 1,352,000 176,000 (30,000) 1,498,000

BROOKS AND CHANDLER Consolidation Worksheet For Year Ending December 31, 2018 Consolidation Entries Debit Credit Brooks Chandler Amount (618,000) 242,000 Accounts Income Statement Revenues Cost of goods sold Gain on Bargain purchase Depreciation and amortization Equity earnings in Chandler Net Income (658,000) 225,000 (175,000) 149,000 (176,000) (635,000) (1,276,000) 467,000 (175,000) 349,000 158,000 [E] [] 42,000 176,000 (218,000) (635,000) 800,000 Statement of Retained Earnings Retained Earnings, 1/1 Net Income Dividends Declared Retained Earnings 12/31 (1,825,000) (635,000) 250,000 (2,210,000) (800,000) [S] (218,000) 30,000 (988,000) (1,825,000) (635,000) 250,000 (2,210,000) 30,000 [D] 394,000 614,000 [D] 30,000 1,528,000 (S+A+1] Balance Sheet Current Assets Investment in Chandler Trademarks Patented technology Equipment Total Assets 220,000 1,498,000 170,000 376,000 668,000 2,932,000 (A) 252,000 42,000 [E] 254,000 447,000 320,000 1,415,000 424,000 1,033,000 988,000 3,059,000

300,000 Liabilities Common Stock Retained Earnings 12/31 Total Liabilities and Equity (187,000) (535,000) (2,210,000) (2,932,000) (127,000) (300,000) [S] (988,000) (1,415,000) (314,000) (535,000) (2,210,000) (3,059,000) 1,600,000 1,600,000 Entries Explanation [1] is to eliminate the equity earnings in Chandler [S] is to eliminate the stockholders equity of Chandler [A] is to record the undervalued patent Undervalued Patent Remaining life of Patent 6 years Amortization per year (252,000 / 6) [D] Is to eliminate the dividend declared by Chandler [E] Is to record the amortization expenses on Patent 252,000 42,000 Multiple Entries Combine for Investment in Chandler Credit Amount Entry [1] Equity Earnings 176,000 Entry [A] Patented Technology 252,000 Entry [S] Subsidiary Stockholding Equity Common stock 300,000 Beginning Retained Earnings 800,000 Total 1,528,000