Alarm Bird Inc. acquired an 85% interest in Clock Corporation on January 2, 2005

Question

Alarm Bird Inc. acquired an 85% interest in Clock Corporation on January 2, 2005 for $38,000 cash when Clock had Capital Stock of $15,000 and Retained Earnings of $25,000. Clock’s assets and liabilities had book values equal to their fair values except for inventory that was undervalued by $2,000. Balance sheets for Alarm Bird and Clock on January 2, 2005, immediately after the business combination, are presented in the first two columns of the consolidated balance sheet working papers.

Alarm Bird Inc. acquired an 85% interest in Clock Corporation on January 2, 2005 for $38,000 cash when Clock had Capital Stock of $15,000 and Retained Earnings of $25,000. Clock’s assets and liabilities had book values equal to their fair values except for inventory that was undervalued by $2,000. Balance sheets for Alarm Bird and Clock on January 2, 2005, immediately after the business combination, are presented in the first two columns of the consolidated balance sheet working papers.

Alarm Bird Corporation and Subsidiary Consolidated Balance Sheet Working Papers at January 2, 2005 Alarm Bird Clock Eliminations Debit Credit Balance Sheet ASSETS Cash $ 68,000 $4,000 Accounts 75,000 9,000 Receivable-net 39,000 10,000 Inventories 170,000 35,000 Plant assets-net Investment in 38,000 Clock Total Assets $ 390,000 $58,000 EQUITIES $ 120,000 $18,000 Payables 100,000 Capital stock 15,000 Retained 170,000 Earnings 25,000 Minority Interest $ TOTAL EQUITIES 390,000 $58,000 Required: 1 Complete the consolidation balance sheet working papers for Alarm Bird and subsidiary at January 1, 2005.

Explanation / Answer

Preliminary computations

Alarm Bird Corporation and Subsidiary Consolidated Balance Sheet Working Papers at January 1, 2005

Fair value (purchase price) of 90% interest acquired January 2, 2005 $38,000 Implied fair value of Clock ($38,000 / 90% $44,706 Book value of Clock’s net assets ( 40,000) Excess cost over book value acquired $ 4,706 Allocation of excess of cost over book value: Inventory $ 2,000 Remainder to goodwill 2,706 Excess of fair value over book value $ 4,706

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