Question

The Holtz Corporation acquired 80 percent of the 100,000 outstanding voting shares of Devine, Inc., for $7.50 per share on January 1, 2014. The remaining 20 percent of Devines shares also traded actively at $7.50 per share before and after Holtzs acquisition. An appraisal made on that date determined that all book values appropriately reflected the fair values of Devines underlying accounts except that a building with a 5-year life was undervalued by $46,500 and a fully amortized trademark with an estimated 10-year remaining life had a $76,000 fair value. At the acquisition date, Devine reported common stock of $100,000 and a retained earnings balance of $351,500. Following are the separate financial statements for the year ending December 31, 2015: Holtz Corporation Devine, Inc. Sales $ (786,000 ) $ (379,000 ) Cost of goods sold 291,000 118,000 Operating expenses 289,000 78,000 Dividend income (16,000 ) 0 Net income $ (222,000 ) $ (183,000 ) Retained earnings, 1/1/15 $ (733,000 ) $ (421,500 ) Net income (above) (222,000 ) (183,000 ) Dividends declared 90,000 20,000 Retained earnings, 12/31/15 $ (865,000 ) $ (584,500 ) Current assets $ 311,500 $ 272,500 Investment in Devine, Inc 600,000 0 Buildings and equipment (net) 722,500 456,000 Trademarks 156,000 212,000 Total assets $ 1,790,000 $ 940,500 Liabilities $ (605,000 ) $ (256,000 ) Common stock (320,000 ) (100,000 ) Retained earnings, 12/31/15 (above) (865,000 ) (584,500 ) Total liabilities and equities $ (1,790,000 ) $ (940,500 ) At year-end, there were no intra-entity receivables or payables. a. Prepare a worksheet to consolidate these two companies as of December 31, 2015. (For accounts where multiple consolidation entries are required, combine all debit entries into one amount and enter this amount in the debit column of the worksheet. Similarly, combine all credit entries into one amount and enter this amount in the credit column of the worksheet.) b. Prepare a 2015 consolidated income statement for Holtz and Devine. (Enter all amounts as positive values.) c. If instead the noncontrolling interest shares of Devine had traded for $5.74 surrounding Holtzs acquisition date, what is the impact on goodwill?

Answer 1

600,000 150,000 750,000 Calculation of Goodwill on the date of acquisition as on 1/1/2017 Fair value transfer by Holtz Corporation for 80% share (100,000 Shares x 80% x 7.50) Fair value of Non Controlling Interest (100,000 shares x 20% 7.50) Total Fair Value of Devine ltd Less: Book Value Common Stock Retained Earnings 1/1/17 Excess of Fair value over book Value Allocation of Excess Fair value to: Building Trademark Goodwill (298,500 - 46,500 - 76,000) 100,000 351,500 298,500 46,500 76,000 176,000 Amortization and Carrying Value of Excess fair value of Assets Assets Value as on 1/1/2017 (A) life in years (B) Amortization per year C = (A/B) 9,300 7,600 Building Trademark Goodwill Total 10 Value as on 1/1/2018 D = (A-C) 37,200 68,400 176,000 281,600 46,500 76,000 176,000 298,500 16,900

HOLTZ CORPORATION AND DIVINE INC. Consolidated Worksheet For the year Ending December 31, 2018 Consolidation Accounts Holtz Corporation Divine Inc Debit Credit (786,000) 291,000 289,000 (16,000) (222,000) (379,000) 118,000 78,000 Non Controlling Consolidated Interest Totals (1,165,000) 409,000 383,900 [D] [C] Sales Cost of goods sold Operating expenses Dividend Income Separate Company Net income Consolidated Net Income NI attributable to Controlling Interest NI attributable to Holtz Corp. 16,900 16,000 (183,000) (33,220) (372,100) 33,220 (338,880) 421,500 42,480 (ADJ) Retained Earnings 1/1 Net Income Dividends Declared Retained Earnings 12/31 (733,000) (222,000) 90,000 (865,000) (421,500) [E] (183,000) 20,000 (584,500) (775,480) (338,880) 90,000 (1,024,360) 16,000 [C] 4,000 584,000 Current Assets Investment in Divine Building and equipments, net Trademarks Goodwill Total Assets 311,500 600,000 722,500 156,000 272,500 - [ADJ] 456,000 [A] 212,000 [A] - [A] 940,500 42,480 37,200 68,400 176,000 642,480 9,300 7,600 [E + A] x 80% [D] [D] 1,206,400 428,800 176,000 1,790,000 2,395,200

(605,000) (320,000) (865,000)| (256,000) (100,000) [E] (584,500) 100,000 (861,000) (320,000) (1,024,360) Liabilities Common stock Retained Earnings 12/31 NCI in Divine, 1/1 NCI in Divine, 12/31 Total liabilites and equity 160,620 [E + A] 20% (160,620) (189,840) (189,840) (2,395,200) (1,790,000) (940,500) 878,480 878,480 Working Notes [Adj. JAdjustment for Conversion from Intial method to equity Method Change in Retained earnings of Divine from 1/1/2017 to 01/01/18 = (421,500 - 351,500) Less: Excess Amortization Adjusted increase in Retained Earnings of Divine Ltd Holtz share 80% ( 53,100 x 80%) 70,000 16,900 53,100 42.480 Net Income attributable to Non Controlling Interest Net Income of Divine Less: Excess Amortization Adjusted Net Income of Divine Non Controlling Share 20% (166,100 x 20%) 183,000 16,900 166,100 33,220 Entries Explanation [C] It is to eliminate the intra entity dividend declared by the subsidiary and recorded as income by parent [E] it is to eliminate the stockholders' equity account of subsidiary while recognizing the Non controlling interest at the beginning of the year Non Controlling Shares: [(Common Stock + Retained Earnigns 01/01/18) > 20%] Investment in Devine : [(Common Stock + Retained Earnigns 01/01/18) > 80%] [A] it is to record the unamortized fair value of assets as on 01/01/18 acquired on 01/01/2017 [D] it is to record the amortization expenses during the year

Total Noncontrolling Interest 01/01/18 20% 100% Adjusted Credit Balance after combining multiple Entries Investment In Holtz 80% Entry [E] Common stock 80,000 Retained Earnings 01/01/18 337,200 Entry [A] Building and equipments, net 29,760 Trademark 54,720 Goodwill 140,800 Total 642,480 20,000 84,300 100,000 421,500 7,440 13,680 35,200 160,620 37,200 68,400 176,000 803,100

HOLTZ CORPORATION AND DIVINE INC Consolidated Income statement For year Ending December 31, 2018 1,165,000 409,000 383,900 Sales Cost of goods sold Operating Expenses Total expenses Consolidated Net Income To non controlling interest To Holtz corporation 792,900 372,100 33,220 338,880 600,000 114,800 714,800 C) if Non controlling interest shares of Devine had traded for $5,74 per share Fair value transfer by Holtz Corporation for 80% share (100,000 Shares x 80% x 7.50) Fair value of Non Controlling Interest (100,000 ~ 20% ~ 5.74) Total Fair Value of Devine ltd Less: Book Value Common Stock Retained Earnings 1/1/17 Excess of Fair value over book Value Allocation of Excess Fair value to: Building Trademark Goodwill (263,300 - 46,500 -76,000) 100,000 351,500 263,300 46,500 76,000 140,800 Impact on Goodwill Goodwill decrease to $ 140,800 140,800