The Krause Corporation acquired 80 percent of the 100,000 outstanding voting sha

Question

The Krause Corporation acquired 80 percent of the 100,000 outstanding voting shares of Leahy, Inc., for $6.30 per share on January 1,2012. The remaining 20 percent of Leahy’s shares also traded actively at $6.30 per share before and after Krause’s acquisition. An appraisal made on that date determined that all book values appropriately reflected the fair values of Leahy’s underlying accounts except that a building with a 5-year life was undervalued by $45,000 and a fully amortized trademark with an estimated 10-year remaining life had a $60,000 fair value. At the acquisition date, Leahy reported common stock of $100,000 and a retained earnings balance of $280,000.

Following are the separate financial statements for the year ending December 31,2013:

Krause Corporation

Leahy, Inc.

Sales

$ (584,000)

$(250,000)

Cost of goods sold

194,000

95,000

Operating expenses

246,000

65,000

Dividend income

(16,000)

–0–

Net income

$ (160,000)

$ (90,000)

Retained earnings, 1/1/13

$ (700,000)

$(350,000)

Net income (above)

(160,000)

(90,000)

Dividends paid

70,000

20,000

Retained earnings, 12/31/13

$ (790,000)

$(420,000)

Current assets

$ 296,000

$ 191,000

Investment in Leahy, Inc

504,000

–0–

Buildings and equipment (net)

680,000

390,000

Trademarks

100,000

144,000

Total assets

$1,580,000

$ 725,000

Liabilities

$ (470,000)

$(205,000)

Common stock

(320,000)

(100,000)

Retained earnings, 12/31/13 (above)

(790,000)

(420,000)

Total liabilities and equities

$(1,580,000)

$(725,000)

a. Prepare a worksheet to consolidate these two companies as of December 31,2013.

b. Prepare a 2013 consolidated income statement for Krause and Leahy.

c. If instead the noncontrolling interest shares of Leahy had traded for $4.85 surrounding Krause’s acquisition date, how would the consolidated statements change?

Krause Corporation

Leahy, Inc.

Sales

$ (584,000)

$(250,000)

Cost of goods sold

194,000

95,000

Operating expenses

246,000

65,000

Dividend income

(16,000)

–0–

Net income

$ (160,000)

$ (90,000)

Retained earnings, 1/1/13

$ (700,000)

$(350,000)

Net income (above)

(160,000)

(90,000)

Dividends paid

70,000

20,000

Retained earnings, 12/31/13

$ (790,000)

$(420,000)

Current assets

$ 296,000

$ 191,000

Investment in Leahy, Inc

504,000

–0–

Buildings and equipment (net)

680,000

390,000

Trademarks

100,000

144,000

Total assets

$1,580,000

$ 725,000

Liabilities

$ (470,000)

$(205,000)

Common stock

(320,000)

(100,000)

Retained earnings, 12/31/13 (above)

(790,000)

(420,000)

Total liabilities and equities

$(1,580,000)

$(725,000)

Explanation / Answer

Consolidation EntriesNoncontrolling Debit Credit Consolidated Interest (E) 15,000 (I) 16,000 (15,000) (700,000) (160,000) 70,000 (790,000) (350,000) (90,000) 20,000 (420,000) 296,000 504,000 191,000 680,000 100,000 0 1,580,000 390,000 144,000 0 725,000 (470,000) (320,000) (790,000) (S)350,000 (I) (*C) 44,000 (205,000) (100,000) (420,000) (*C) 44,000 (A) 36,000 (A) 54,000 (A)145,000 16,000 (725,000) 4- 6 219,000 15,000 (204,000) (744,000) (204,000) 70,000 (878,000) 1,097,000 292,000 145,000 2,021,000 (675,000) (320,000) (878,000) (S)100,000 760,000 (834,000) 289,000 326,000 -0- 487,000 -0- (S)360,000 (A)188,000 (E) 9,000 (E) 6,000 (S) 90,000 (A) 47,000 (1,580,000) 4,000 Totals 760,000 (137,000) 148,000 (148,000) (2,021,000) -=========================================================================== b. KRAUSE CORPORATION AND LEAHY, INC. Consolidated Income Statement For Year Ending December 31, 2013 Sales Cost of goods sold Operating expenses Total expenses Consolidated net income $834,000 $289,000 326,000 615,000 $219,000 To 20% noncontrolling interest To controlling interest $15,000 $204,000 =================================================================================== c. Consideration transferred by Krause for 80% of Leahy Noncontrolling interest fair value ($4.85 20,000 shares) Leahy fair value Fair value of Leahys underlying net assets Goodwill $504,000 97,000 $601,000 485,000 $116,000 If the noncontrolling interest fair value was $4.85 per share at the acquisition date, then goodwill declines to $116,000 and the noncontrolling interest total would also decline from $148,000 to $119,000. Worksheet entries (S), (A1) and (A2) assuming a $4.85 noncontrolling interest acquisition-date fair value: (S) (A1) (A2) Common Stock-Leahy Retained Earnings- Leahy 1/1 Investment in Leahy Noncontrolling Interest 100,000 350,000 Buildings and Equipment (net) Trademarks Investment in Leahy Noncontrolling Interest 36,000 54,000 360,000 90,000 72,000 18,000 Goodwill Investment in Leahy 116,000 116,000 Fair value at acquisition date Relative fair values of identifiable net assets 80% and 20% of $485,000 (acquisition date fair value of net identifiable assets) =============================================

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