On January 1, 2015, John Doe Enterprises (JDE) acquired a 55% interest in Bubba

Question

On January 1, 2015, John Doe Enterprises (JDE) acquired a 55% interest in Bubba Manufacturing, Inc. (BMI). JDE paid for the transaction with $3 million cash and 500,000 shares of JDE common stock (par value $1.00 per share. At the time of the acquisition, BMI’s book value was $16,970,000. On January 1, JDE stock had a market value of $14.90 per share and there was no control premium in this transaction. Any consideration transferred over book value is assigned to goodwill. BMI had the following balances on January 1, 2015. Book Value Fair Value Land $1,700,000 $ 2550,000 Buildings (7 year remaining life) 2,700,000 3,400,000 Equipment (5 year remaining life) 3,700,000 3,300,000 For internal reporting purposes, JDE employed the equity method to account for this investment. The following account balances are for the year ending December 31, 2015 for both companies: John Doe Enterprises Bubba Manufacturing Revenues $(298,000,000) $(103,750,000) Expenses 271,000,000 95,800,000 Equity in income of Bubba Manufacturing (4,361,500) -0- Net Income $(31,361,500) $(7,950,000) Retained Earnings, January 1, 2015 $(2,500,000) $(100,000) Net income (above) (31,361,500) (7,950,000) Dividends paid 5,000,000 3,000,000 Retained earnings, December 31, 2015 $(28,861,500) $(5,050,000) Current assets $30,500,000 $20,800,000 Investment in Bubba Manufacturing 13,161,500 Land 1,500,000 1,700,000 Buildings 5,600,000 2,360,000 Equipment (net) 3,100,000 2,960,000 Total Assets 53,861,500 27,820,000 Accounts payable (3,100,000) (4,900,000) Notes payable (1,000,000) Common Stock (2,900,000) (6,000,000) Additional Paid-in Capital (19,000,000) (10,870,000) Retained earnings, Dec. 31, 2015 (above) (28,861,500) (5,050,000) Total Liabilities and Stockholders’ Equity $(53,861,500) $(27,820,000) Required: Prepare a consolidated worksheet for this business combination. Assume goodwill has been reviewed and there is no goodwill impairment.

Explanation / Answer

Consolidated Worksheet for the business combination (All values in $) BMI Opening Balances as on 1 January 2015 (Date of Acquisition) Assets Fair Value Market Value Land 1700000 2500000 Buildings 2700000 3400000 Equipment 3700000 3000000 8100000 8900000 Interest of John Doe in Bubba Manufacturing is 55% Thus, 55% of the book value = 9333500 $ is JDE's interest Goodwill is the difference between the fair value of the assets and controlling interest = 1233500 $ Consideration paid by JDE for BMI Cash 3000000 Shares of JDE Common Stock Face Value 500000 Premium on Shares 5833500 Consolidated Profit and Loss Account as on 31 December 2015 $ Manufacturing Revenues 29800000 Cost of Goods Sold -27100000 Share in Equity of Subsidiary 4361500 Net Income 7061500 Dividends Paid -2500000 Income trfd to Retained Earnings 4561500 Consolidated Balance Sheet as on 31 December 2015 Assets Current Assets 30500000 Investment in Subsidiary 11156000 Land 1500000 Buildings 5600000 Goodwill 1233500 Equipment (net) 3100000 Total Assets 53089500 Liabilities Accounts Payable 3100000 Notes Payable 1000000 Common Stock 2900000 Additional Pay-in Capital 18500000 Retained Earnings 27589500 53089500

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