Haynes, Inc., obtained 100 percent of Turner Company’s common stock on January 1
ID: 2423279 • Letter: H
Question
Haynes, Inc., obtained 100 percent of Turner Company’s common stock on January 1, 2014, by issuing 9,000 shares of $10 par value common stock. Haynes’s shares had a $15 per share fair value. On that date, Turner reported a net book value of $100,000. However, its equipment (with a five-year remaining life) was undervalued by $5,000 in the company’s accounting records. Also, Turner had developed a customer list with an assessed value of $30,000, although no value had been recorded on Turner’s books. The customer list had an estimated remaining useful life of 10 years. The following figures come from the individual accounting records of these two companies as of December 31, 2014: Haynes Turner Revenues $ (600,000 ) $ (230,000 ) Expenses 440,000 120,000 Investment income Not given 0 Dividends declared 80,000 50,000 The following figures come from the individual accounting records of these two companies as of December 31, 2015: Haynes Turner Revenues $ (700,000 ) $ (280,000 ) Expenses 460,000 150,000 Investment income Not given 0 Dividends declared 90,000 40,000 Equipment 500,000 300,000 a. What balance does Haynes’s Investment in Turner account show on December 31, 2015, when the equity method is applied? b. What is the consolidated net income for the year ending December 31, 2015? c-1. What is the consolidated equipment balance as of December 31, 2015? c-2. Would this answer be affected by the investment method applied by the parent? Yes No d. Prepare entry *C if the parent used the equity method. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
Explanation / Answer
Answer:a
An allocation of the acquisition price (based on the fair value of the shares issued) must be made first.
Acquisition fair value (consideration paid by Haynes). $135,000
Book value equivalency ....................................................... (100,000)
Excess of Turner fair value over book value .................. $ 35,000
Excess fair value assigned to specific Remaining Annual excess
accounts based on fair value life amortizations
Equipment ............................. $5,000 5 yrs. $1,000
Customer List ......................... 30,000 10 yrs. 3,000
$4,000
Acquisition-date fair value.................................................... $135,000
2014 Income accrual ............................................................. 110,000
2014 Dividends declared by Turner .................................. (50,000)
2014 Amortizations (above) ................................................. (4,000)
2015 Income accrual ............................................................. 130,000
2015 Dividends declared by Turner .................................. (40,000)
2015 Amortizations ................................................................ (4,000)
Investment in Turner account balance ............................ $277,000
Answer: b
Net income of Haynes ................................................................ $240,000
Net Income of Turner ............................................................ 130,000
Depreciation expense............................................................ (1,000)
Amortization expense............................................................ (3,000)
Consolidated net income 2015 ..................................... $366,000
Answer: c-1
Equipment balance Haynes ................................................ $500,000
Equipment balance Turner ................................................. 300,000
Allocation based on fair value (above) ............................. 5,000
Depreciation for 20142015 ................................................. (2,000)
Consolidated equipment—December 31, 2015.............. $803,000
Parent's choice of an investment method has no impact on consolidated totals.
Answer: c-2
If the initial value method was applied during 2014, the parent would have recorded dividend income of $50,000 rather than $110,000 (as equity income). Income is, therefore, understated by $60,000. In addition, amortization expense of $4,000 was not recorded. Thus, the January 1, 2015, retained earnings is understated by $56,000 ($60,000 – $4,000). Worksheet Entry *C thus serves to adjust the parent’s beginning retained earning to a full accrual basis:
Investment in Turner ................................................. 56,000
Retained earnings, 1/1/15 (Haynes) ................ 56,000
If the partial equity method was applied during 2014, the parent would have failed to record amortization expense of $4,000. Retained earnings are overstated by $4,000 and are corrected through Entry *C:
Retained earnings, 1/1/15 (Haynes) ...................... 4,000
Investment in Turner ........................................... 4,000
If the equity method was applied during 2014, consolidated retained earnings would equal the parent's retained earnings. Thus, no adjustment would be necessary.
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