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Solution 3-19

Part a: Goodwill Impairment TestStep 1

Total fair

Carrying

Potential goodwill

value

value

impairment?

Sand Dollar

$510,000

<

$530,000

yes

Salty Dog

580,000

<

610,000

yes

Baytowne

560,000

>

280,000

no

Part b: Goodwill Impairment TestStep 2 (Sand Dollar and Salty Dog only)
Sand Dollartotal fair value

$510,000

Fair values of identifiable net assets


Tangible assets

$190,000

Trademark

150,000

Customer list

100,000

Liabilities

(30,000)

410,000

Implied value of goodwill

100,000

Carrying value of goodwill

120,000

Impairment loss

$20,000

Salty Dogtotal fair value

$580,000

Fair values of identifiable net assets


Tangible assets

$200,000

Unpatented technology

125,000

Licenses

100,000

425,000

Implied value of goodwill

155,000

Carrying value of goodwill

150,000

No impairmentimplied value > carry value

-0-

Part c:

No changes in tangible assets or identifiable intangibles are reported based on goodwill


impairment testing. The sole purpose of the valuation exercise is to estimate an implied value for
goodwill. Destin will report a goodwill impairment loss of $20,000, which will reduce the amount
of goodwill allocated to Sand Dollar.

However, because the fair value of Sand Dollars trademark is less than its carrying amount, the
account should be subjected to a separate impairment testing procedure to see if the carrying
value is recoverable in future estimated cash flows.

Solution 3-20

Fair Value Allocation and Annual Amortization:


Acquisition fair value (consideration transferred) ........................

$490,000

Book value (assets minus


liabilities or total stockholders'
equity) ....................................................................................
Excess fair value over book value ................................................

(400,000)
$ 90,000

Excess fair value assigned to specific


accounts based on individual fair values

Remaining

Annual excess

life

amortizations

--

--

Land ...............................................

$10,000

Buildings ......................................

40,000

4 yrs.

Equipment ......................................

(20,000)

5 yrs.

$10,000
(4,000)

Total assigned to specific


accounts .................................

30,000

Goodwill ........................................

60,000

Total ...............................................

$90,000

indefinite

-0$6,000

Consolidation Entries as of December 31, 2014

Entry S
Common stockAbernethy....................................................

250,000

Additional paid-in capital ......................................................

50,000

Retained earnings1/1/14 .....................................................

100,000

Investment in Abernethy ..................................................

400,000

(To eliminate stockholders' equity accounts of subsidiary)

Entry A
Land .......................................................................................

10,000

Buildings ................................................................................

40,000

Goodwill ................................................................................

60,000

Equipment .......................................................................

20,000

Investment in Abernethy ..................................................

90,000

(To recognize allocations attributed to fair value of specific accounts at acquisition date
with residual fair value recognized as goodwill).

Entry I
Equity in subsidiary earnings .................................................

74,000

Investment in Abernethy ..................................................


(To eliminate $80,000 income accrual for 2014 less $6,000 amortization
recorded by parent using equity method)

74,000

Entry D
Investment in Abernethy ........................................................

10,000

Dividends declared ..........................................................

10,000

(To eliminate intra-entity dividend transfers)

Entry E
Depreciation expense..............................................................

6,000

Equipment...............................................................................

4,000

Buildings..........................................................................

10,000

(To recognize current year amortization expense)

Consolidation Entries as of December 31, 2015


Entry S
Common stockAbernethy ...................................................

250,000

Additional paid-in capital .......................................................

50,000

Retained earnings1/1/15......................................................

170,000

Investment in Abernethy ..................................................

470,000

(To eliminate beginning stockholders' equity of subsidiarythe Retained Earnings account


has been adjusted for 2014 income and dividends. Entry *C is not needed because equity
method was applied.)

Entry A
Land .......................................................................................

10,000

Buildings ................................................................................

30,000

Goodwill ................................................................................

60,000

Equipment .......................................................................

16,000

Investment in Abernethy ..................................................

84,000

(To recognize allocations relating to investmentbalances shown here are as of beginning


of current year [original allocation less excess amortizations for the prior period])

Entry I
Equity in subsidiary earnings .................................................

104,000

Investment in Abernethy ..................................................

104,000

(To eliminate $110,000 income accrual less $6,000 amortization recorded by parent during
2015 using equity method)

Entry D
Investment in Abernethy ........................................................

30,000

Dividends declared ..........................................................

30,000

(To eliminate intra-entity dividend transfers)

Entry E
Same as Entry E for 2014

Solution 3-21

Acquisition-date allocation and annual excess fair value amortizations:


Acquisition date value (consideration paid) ...........................

$500,000

Book value .............................................................................

(400,000)

Excess price paid over book value .........................................

$100,000

Excess price paid assigned to specific

Remaining

accounts based on fair values

Equipment

Annual excess
life

amortizations

$ 20,000

5 yrs.

$4,000

Long-term liabilities

30,000

4 yrs.

7,500

Goodwill

50,000

indefinite

Total

$100,000

-0$11,500

Consolidation entries as of December 31, 2014

Entry S
Common stockAbernethy .................................................

250,000

Additional paid-in capital .....................................................

50,000

Retained earnings1/1/14 ...................................................

100,000

Investment in Abernethy.................................................

400,000

(To eliminate stockholders' equity accounts of subsidiary)

Entry A
Equipment ............................................................................

20,000

Long-term liabilities .............................................................

30,000

Goodwill ...............................................................................

50,000

Investment in Abernethy ................................................

100,000

(To recognize allocations determined above in connection with acquisition-date fair values)

Entry I
Dividend income ..................................................................

10,000

Dividends declared ........................................................

10,000

(To eliminate intra-entity dividend declarations recorded by parent as income)

Entry E
Depreciation expense ...........................................................

4,000

Interest expense.....................................................................

7,500

Equipment.......................................................................

4,000

Long-term liabilities.......................................................

7,500

(To recognize 2014 amortization expense)

Consolidation Entries as of December 31, 2015

Entry *C
Investment in Abernethy ......................................................

58,500

Retained earnings1/1/15 (Chapman) ..........................

58,500

(To convert parent company figures to equity method by recognizing subsidiary's increase
in book value for prior year [$80,000 net income less $10,000 dividend declaration] and
excess amortizations for that period [$11,500])
Entry S
Common stockAbernethy .................................................

250,000

Additional paid-in capital .....................................................

50,000

Retained earnings1/1/15 ...................................................

170,000

Investment in Abernethy ................................................

470,000

(To eliminate beginning of year stockholders' equity accounts of subsidiary. The retained
earnings balance has been adjusted for 2014 net income and dividends)
Entry A
Equipment ............................................................................

16,000

Long-term liabilities .............................................................

22,500

Goodwill ...............................................................................

50,000

Investment in Abernethy ................................................

88,500

(To recognize allocations relating to investmentbalances shown here are as of the


beginning of the current year [original allocation less excess amortizations for the prior
period])
Entry I
Dividend income ..................................................................

30,000

Dividends declared ..................................................

30,000

(To eliminate intra-entity dividend declarations recorded by parent as income)


Entry E
Same as Entry E for 2014
Solution 3-28

a. OBrien acquisition-date fair value ........................................

$550,000

OBrien book value ................................................................

(350,000)

Fair value in excess of book value .........................................

$200,000

Excess assigned to specific

Annual

accounts based on fair value

Remaining

excess

life amortizations
Trademarks ...........................................

$100,000

indefinite

Customer relationships.........................

75,000

5 yrs.

Equipment ............................................

(30,000)

10 yrs.

Goodwill ..............................................

55,000

Total .....................................................

$200,000

-0$15,000
(3,000)

indefinite

-0$12,000

If the partial equity method were in use, the Income of OBrien account would have had a balance
of $222,000 (100% of OBrien's reported income for the period). If the initial value method were in
use, the Income of OBrien account would have had a balance of $80,000 (100% of the dividends
declared by OBrien). The Income of OBrien balance is an equity accrual of $222,000 (100% of
OBriens reported income) less excess amortizations of $12,000 (as computed above). Thus, the
equity method must be in use.

b. Students can develop consolidated figures conceptually, without relying on a worksheet or


consolidation entries. Thus, part b. asks students to determine independently each balance to be
reported by the business combination.

Revenues = $1,645,000 (the accounts of both companies combined)

Cost of goods sold = 528,000 (the accounts of both companies combined)

Amortization expense = $40,000 (the accounts of both companies and the acquisition-related
adjustment of $15,000)

Depreciation expense = $142,000 (the accounts for both companies and the acquisition-related
depreciation adjustment of $3,000)

Income from OBrien = $0 (the balance reported by the parent is removed and replaced with the
subsidiarys individual revenue and expense accounts)

Net Income = 935,000 (consolidated revenues less expenses)

Retained earnings, 1/1 = $700,000 (only the parent's retained earnings figure is included)

Dividends declared = $142,000 (the subsidiary's dividends were attributable to the parent and,
thus, as an intra-entity transfer are eliminated)

Retained earnings, 12/31 = $1,493,000 (the beginning balance for the parent plus consolidated net
income less consolidated [parent] dividends)

Cash = $290,000 (the accounts of both companies are added together)

Receivables = $281,000 (the accounts of both companies are combined)

Inventory = $310,000 (the accounts of both companies are combined)

Investment in OBrien = $0 (the parents balance is removed and replaced with the subsidiarys
individual asset and liability accounts)

Trademarks = $634,000 (the accounts of both companies are added together plus the 100,000
fair value adjustment)

Customer relationships = $60,000 (the initial $75,000 fair value adjustment less $15,000
amortization expense)

Equipment = $1,170,000 (both companys balances less the $30,000 fair value adjustment net of
$3,000 in depreciation expense reduction)

Goodwill = $55,000 (the original allocation)

Total assets = $2,800,000 (summation of consolidated balances)

Liabilities = $907,000 (the accounts of both companies are combined)

Common stock = $400,000 (parent balance only)

Retained earnings, 12/31 = $1,493,000 (computed above)

Total liabilities and equities = 2,800,000 (summation of consolidated balances)

c.

PATRICK COMPANY AND CONSOLIDATED SUBSIDIARY


Consolidation Worksheet
For Year Ending December 31
Consolidation EntriesConsolidated
Accounts
Revenues
Cost of goods sold

Patrick
(1,125,000)

OBrien

Debit

Credit

(520,000)

Totals
(1,645,000)

300,000

228,000

Depreciation expense

75,000

70,000

Amortization expense

25,000

-0-

(E) 15,000

40,000

Income from OBrien

(210,000)

-0-

(I) 210,000

-0-

Net income

(935,000)

(222,000)

Retained earnings, 1/1

(700,000)

(250,000)

Net income (above)

(935,000)

(222,000)

Dividends declared

142,000

80,000

Retained earnings, 12/31

(1,493,000)

(392,000)

528,000
(E) 3,000

142,000

(935,000)
(S)250,000

(700,000)
(935,000)
(D) 80,000

142,000
(1,493,000)

Cash

185,000

105,000

290,000

Receivables

225,000

56,000

281,000

Inventory

175,000

135,000

310,000

Investment in OBrien

680,000

(D) 80,000

(S) 350,000
(A) 200,000

-0-

(I) 210,000
Trademarks
Customer relationships
Equipment (net)
Goodwill
Total assets

474,000
-0925,000
-02,664,000

60,000
-0272,000
-0-

(A) 100,000

634,000

(A) 75,000

(E) 15,000

60,000

(E)

(A) 30,000

1,170,000

3,000

(A) 55,000

55,000

628,000

Liabilities

(771,000)

(136,000)

Common stock

(400,000)

(100,000)

Retained earnings (above)

(1,493,000)

(392,000)

Total liabilities and equity

(2,664,000)

(628,000)

2,800,000
(907,000)
(S)100,000

(400,000)
(1,493,000)

888,000

888,000

(2,800,000)

460,000340,000
Royalty agreements

800,000
920,000

380,000

(A) 20,000

(E) 10,000

Trademark

-0-

-0-

(A) 30,000

(E)

Total assets

2,900,000

1,235,000

5,000

1,310,000
25,000
3,700,000

Liabilities

(780,000)

(470,000)

(1,250,000)

Preferred stock

(300,000)

Common stock

(500,000)

(100,000)

(S) 100,000

(500,000)

Additional paid-in capital

(300,000)

(30,000)

(S) 30,000

(300,000)

Retained earnings 12/31

(1,020,000)

(635,000)

Total liabilities and equity

(2,900,000)

(1,235,000)

-0-

(300,000)

(1,350,000)
890,000

890,000

(3,700,000)