E1.

Equity Method Investment with Intercompany Sales

Calculation of 2016 equity in Coca-Cola FEMSAs net income:
Coca-Colas share of Coca-Cola FEMSAs reported income
(28% x $5 million)
+ Realized profit on intercompany sales
[28% x ($1,350,000 ($1,350,000/1.35))]
- Unrealized profit on intercompany sales
[28% x ($1,215,000 ($1,215,000/1.35))]
Equity in net income of Coca-Cola FEMSA
Entry to record equity in Coca-Cola FEMSAs net income:
Investment in Coca-Cola FEMSA
Equity in net income of Coca-Cola FEMSA

$ 1,400,000
98,000
(88,200)
$ 1,409,800

1,409,800
1,409,800

E2.6

Changes in Acquisition Values

a. The value changes occurred during the measurement period. We know this because
goodwill is adjusted, implying that the initial acquisition entry has been corrected.
b.
Identifiable intangible assets
Goodwill
Earnings contingency liability
Inventories
Plant and equipment, net
Long-term liabilities

6
34
5
5
30
10

E2.8

Identifiable Intangibles
(all amounts in thousands)
a. Identifiable intangibles reported in an acquisition are those arising from contractual
and other legal rights and/or those which are separable.
Of the eight previously unreported intangibles listed, five appear to meet the criteria:

Customer contracts
Brand names
Favorable leases
Developed technology
In-process R&D

$1,000
5,000
400
1,500
300

b.
Price paid
Fair value of identifiable net assets:
Current assets
Plant and equipment
Licenses and trademarks
Customer contracts
Brand names
Favorable leases
Developed technology
In-process R&D
Current liabilities
Long term liabilities
Goodwill

$ 50,000
$

300
4,000
7,000
1,000
5,000
400
1,500
300
(800)
(11,000)

7,700
$ 42,300

c.
Current assets
Plant and equipment
Licenses and trademarks
Customer contracts
Brand names
Favorable leases
Developed technology
In-process R&D
Goodwill
Current liabilities
Long term liabilities
Cash

300
4,000
7,000
1,000
5,000
400
1,500
300
42,300
800
11,000
50,000

E2.10 Contingent Consideration

(all amounts in millions)
a. Agreement (1) is reported at the present value of the expected payment, calculated as
follows:

($120 $100) x 25% x 55% =

$ 2.750

($150 $100) x 25% x 15% =

1.875

Total expected value

$ 4.625

Present value at 20% = $4.625/(1.20)4 = $2.23

Agreement (2)s $1 million payment is reported as part of Aircastles acquisition cost.

The payment related to services to be provided subsequent to the acquisition is
expensed as incurred. The present value of the $1 million payment is calculated as
follows:

$1/(1.05) = $0.95

The total amount Aircastle reports at the date of acquisition as a liability and as part
of total acquisition cost is $2.23 + $0.95 = $3.18 million, or $3 million, rounded to
the nearest million.

b. (1) The value change is a correction of the original acquisition entry.

Contingent consideration liability
Goodwill

0.5
0.5

(2) The value change is not a correction of the acquisition entry. GAAP requires that
the earnouts be marked to market through income.
Contingent consideration liability
Gain on earnout (income)

0.5
0.5

E3.10 Consolidation with Revaluations of Recorded Net Assets

(amounts in millions)
a.
Acquisition cost
Shelby book value
Excess of acquisition cost over book value
Excess of fair value over book value:
Cash and receivables
Inventory
Property and equipment, net
Long term liabilities
Goodwill

$ 50
(15)
35
$

1
(3)
(10)
2

10
$ 45

b.
Consolidation Working Paper (in millions)
Accounts Taken
From Books
Panoz
Dr(Cr)
Cash and receivables

Inventory
Property and equipment, net
Investment in Shelby

10

Eliminations

Shelby
Dr(Cr)
$

Dr

Cr

(R) 1

Consolidated
Balances Dr(Cr)
$

16

40

10

3 (R)

47

350

100

10 (R)

440

50

--

15 (E)

--

35 (R)
Goodwill

--

--

(60)

(20)

Long term liabilities

(200)

(80)

(R) 2

(278)

Capital stock

(120)

(10)

(E) 10

(120)

Retained earnings

(100)

(6)

(E) 6

(100)

AOCI

10

(1)

(E) 1

10

Treasury stock

20

____

$ 65

Current liabilities

Total

(R) 45

45
(80)

2 (E)
$ 65

20
$

c.
Panoz Corporation and Subsidiary
Consolidated Balance Sheet
Date of Acquisition
Assets
Cash and receivables
Inventory
Property and equipment, net
Goodwill

Total assets

$ 16
47
440
45

____
$ 548

Liabilities
Current liabilities
Long-term liabilities
Total liabilities
Stockholders equity
Capital stock
Retained earnings
Accumulated other
comprehensive income
Treasury stock
Total equity
Total liabilities and equity

$ 80
278
358

120
100
(10)
(20)
190
$ 548

E4.9

Identifiable Intangibles and Goodwill, U.S. GAAP

Amortization expense for 2017:
Customer relationships
Favorable leaseholds
Total

$4,000,000/4
$8,000,000/5

$ 1,000,000
1,600,000
$ 2,600,000

Impairment testing identifiable intangibles:

Customer relationships
Book value = $4,000,000 2 x ($4,000,000/4) = $2,000,000
Book value > Sum of undiscounted cash flows? $2,000,000 > $1,200,000: Yes
Impairment loss = $2,000,000 - $900,000 = $1,100,000
Favorable leaseholds
Book value = $8,000,000 1.5 x ($8,000,000/5) = $5,600,000
Book value > Sum of undiscounted cash flows? $5,600,000 < $6,000,000: No
Brand names
Book value = $18,000,000
Book value > Sum of discounted cash flows? $18,000,000 > $7,000,000: Yes
Impairment loss = $18,000,000 - $7,000,000 = $11,000,000

Impairment testing Goodwill:

Reporting Unit

Unit FV < BV?

Asia

$400,000,000 > $300,000,000:

No

South America

$350,000,000> $200,000,000:
No

Europe

$500,000,000< $600,000,000:
Yes

Fair Value of GW

GW Impairment Loss

$500,000,000 385,000,000
= 115,000,000

$250,000,000 115,000,000
= $135,000,000

Summary:
Amortization expense identifiable intangibles
Impairment losses identifiable intangibles
Goodwill impairment loss
Total

2,600,000
12,100,000
135,000,000
$149,700,000

E4.13 Equity Method Income and Working Paper Eliminations

(in millions)
a.
Investment balance, 1/1/17
Investment balance, 1/1/16 = $2,000 + $200
Change
2016 dividends
2016 equity in net income
Write-off of identifiable intangibles =
Sabers 2016 net income

$ 2,286
2,200
86
25
111
8
$ 119

($40/5)

b.
Sabers stockholders equity, 1/1/16
2016 net income
2016 dividends
Sabers stockholders equity, 1/1/17

$ 2,000
119
(25)
$ 2,094

Sabers 2017 net income

Write-off of identifiable intangibles =
Equity in net income of Saber

c.

d. (C)
Equity in net income of Saber
Dividends Saber
Investment in Saber
(E)
Stockholders equity Saber
Investment in Saber

($40/5)
$

150
(8)
142

142
30
112
2,094
2,094

(R)
Identifiable intangibles
32
Goodwill
160
Investment in Saber
192
Beginning-of-year identifiable intangibles balance is $40 - $8 = $32.
Total goodwill is $200 total excess of acquisition cost over book value less $40 fair
value of identifiable intangibles = $160.
(O)
Amortization expense
Identifiable intangibles

8
8

e. At the beginning of 2021, the identifiable intangibles are fully amortized and the
remaining balance for goodwill is $160 - $100 = $60.
(R)
Goodwill
Investment in Saber

60

There are no revaluation write-offs in 2021, so eliminating entry O is not required.

60