he Holtz Corporation acquired 80 percent of the 100,000 outstanding voting share

Question

he Holtz Corporation acquired 80 percent of the 100,000 outstanding voting shares of Devine, Inc., for $6.00 per share on January 1, 2017. The remaining 20 percent of Devine’s shares also traded actively at $6.00 per share before and after Holtz’s acquisition. An appraisal made on that date determined that all book values appropriately reflected the fair values of Devine’s underlying accounts except that a building with a 5-year future life was undervalued by $70,500 and a fully amortized trademark with an estimated 10-year remaining life had a $62,000 fair value. At the acquisition date, Devine reported common stock of $100,000 and a retained earnings balance of $158,500. Following are the separate financial statements for the year ending December 31, 2018: Holtz Corporation Devine, Inc. Sales $ (731,000 ) $ (316,000 ) Cost of goods sold 276,000 149,000 Operating expenses 261,000 83,000 Dividend income (16,000 ) 0 Net income $ (210,000 ) $ (84,000 ) Retained earnings, 1/1/18 $ (748,000 ) $ (228,500 ) Net income (above) (210,000 ) (84,000 ) Dividends declared 60,000 20,000 Retained earnings, 12/31/18 $ (898,000 ) $ (292,500 ) Current assets $ 372,500 $ 170,500 Investment in Devine, Inc 480,000 0 Buildings and equipment (net) 720,000 324,000 Trademarks 193,000 153,000 Total assets $ 1,765,500 $ 647,500 Liabilities $ (547,500 ) $ (255,000 ) Common stock (320,000 ) (100,000 ) Retained earnings, 12/31/18 (above) (898,000 ) (292,500 ) Total liabilities and equities $ (1,765,500 ) $ (647,500 ) At year-end, there were no intra-entity receivables or payables. Prepare a worksheet to consolidate these two companies as of December 31, 2018. Prepare a 2018 consolidated income statement for Holtz and Devine. If instead the noncontrolling interest shares of Devine had traded for $3.91 surrounding Holtz’s acquisition date, what is the impact on goodwill?

Explanation / Answer

a. Prepare a worksheet to consolidate these two companies as of December 31, 2015. Answer: Fair Value Allocation and Amortization: Consideration transferred by Holtz $576,000 Non-controlling interest fair value $144,000 Devine total fair value 1/1/14 $720,000 Devine book value 1/1/14 $326,500 Fair value in excess of book value $393,500 Excess fair value assigned to specific Accounts based on fair value: Remaining Life (in years) Annual Excess amortizations Building $85,500 5 $17,100 Trademark $64,000 10 $6,400 Goodwill $244,000 Indefinite $0 $23,500 Explanation of Consolidation Entries Found on this Worksheet: Entry *C: Convert the parent’s 1/1/15 retained earnings balance from the initial value method to the accrual basis. Change in subsidiary RE from 1/1/14 to 1/1/15 $70,000 Excess amortization for 2014 $23,500 Adjusted subsidiary RE increase $46,500 Percentage ownership by parent 80% *C conversion entry $37,200 Entry S: Eliminates stockholders' equity accounts of subsidiary while recognizing Non-controlling interest balance (20%) as of the beginning of the current year. Entry A: Recognizes acquisition-date fair value allocations less one year of amortization for building and trademark and increases beginning balance of the Non-controlling interest for its share. Entry I: Eliminates Intra-entity dividends declared by subsidiary and recorded as income by parent. Entry E: Recognizes amortization expense for current year. Columnar entry - Recognizes net income attributable to Non-controlling interest = [($97,000 – $23,500)*20%] HOLTZ CORPORATION AND DEVINE, INC. Consolidation Worksheet For Year Ending December 31, 2018 Accounts Holtz Corporation Devine Inc Consolidation Entries Non Controlling Interest Consolidated Total Debit Credit Sales ($641,000) ($399,000) ($1,040,000) Cost of goods sold $198,000 $176,000 $374,000 Operating expenses $273,000 $126,000 (E) $23,500 $422,500 Dividend income ($16,000) $0 (I) $16,000 $0 Separate company net income ($186,000) ($97,000) Consolidated net income ($243,500) NI attributable to Non-controlling interest ($14,700) $14,700 NI attributable to Holtz Corp. ($228,800) Retained earnings, 1/1 ($762,000) ($296,500) (S) $296,500 (*C) $37,200 ($799,200) Net income (above) ($186,000) ($97,000) ($228,800) Dividends declared $70,000 $20,000 (I) $16,000 $4,000 $70,000 Retained earnings, 12/31 ($878,000) ($373,500) ($958,000) Current assets $121,000 $120,500 $241,500 Investment in Devine $576,000 $0 (*C) $37,200 (S) $317,200 $0 $296,000 Buildings and equipment (net) $887,000 $335,000 (A) $68,400 (E) $17,100 $1,273,300 Trademarks $149,000 $236,000 (A) $57,600 (E) $6,400 $436,200 Goodwill $0 $0 (A) $244,000 $244,000 Total assets $1,733,000 $691,500 $2,195,000 Liabilities ($535,000) ($218,000) ($753,000) Common stock ($320,000) ($100,000) (S) $100,000 ($320,000) Retained earnings, 12/31 (above) ($878,000) ($373,500) ($958,000) NCI in Devine, 1/1 (S) $79,300 (A) $74,000 $153,300 NCI in Devine, 12/31 $164,000 ($164,000) Total liabilities and equities ($1,733,000) ($691,500) $843,200 $843,200 ($2,195,000) b. Prepare a 2018 consolidated income statement for Holtz and Devine. Answer: HOLTZ CORPORATION AND DEVINE, INC. Consolidated Income Statement For Year Ending December 31, 2018 Sales $1,040,000 Cost of goods sold $374,000 Operating expenses $422,500 Total expenses $796,500 Consolidated net income $243,500           To 20% Non-controlling interest $14,700           To Holtz Corporation $228,800 c. If instead the noncontrolling interest shares of Devine had traded for $3.91 surrounding Holtz’s acquisition date, what is the impact on goodwill? Answer: Consideration transferred by Holtz for 80% of Devine $576,000 Non-controlling interest fair value ($3.91*20,000 shares) $78,200 Devine fair value $654,200 Fair value of Devine’s underlying net assets (100000*3.91) $391,000 Goodwill $263,200 If the Non-controlling interest fair value was $3.91 per share at the acquisition date, then goodwill increases to $263200. The Non-controlling interest total would also increase from $164,000 to $183,200. Goodwill if Devine shares trade at $6.00 = $244,000 Goodwill if Devine shares trade at $3.91 = $263,200 That is, Amount of increase in Goodwill = -$19,200 (This is the amount difference) NCI if Divine share trade at $6.00 = $164,000 Therefore, NCI if divine share trade at $3.91 = $183,200

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.