Chapter 3, Problem 25P

a.

To determine

Determine December 31, 2018, Investment in Company M balance.

Explanation of Solution

Investment in Company M balance:

Particulars		Amount
Consideration transferred		$         5,875,000
Equity in Company M
2017 $\left(\$480,000-\$330,000\right)$	$       150,000
2018 $\left(\$900,000-\$330,000\right)$	$       630,000
Post-acquisition earnings		$            780,000
Dividends of Company M		$             (75,000)
Investment balance on 31/12/2018		$         6,580,000
Excess acquisition fair value:
Unpatented technology $\left(\$800,000÷8\right)$		$            100,000
Patents $\left(\$2,500,000÷10\right)$		$            250,000
Long term debt $\left(\$100,000÷5\right)$		$             (20,000)
Annual amortization		$            330,000

Table: (1)

b.

To determine

Prepare a worksheet to determine the consolidated values to be reported on Company A’s financial statements.

Explanation of Solution

Worksheet to determine the consolidated values to be reported on Company A’s financial statements:

Income statement	Company A	Company M	Debit($)	Credit($)	Consolidated Balances
Revenues	$   (6,400,000)	$        (3,900,000)			$  (10,300,000)
Cost of goods sold	$    4,500,000	$         2,500,000			$     7,000,000
Depreciation expense	$       875,000	$            277,000			$     1,152,000
Amortization expense	$       430,000	$            103,000	E 350,000		$        883,000
Interest expense	$         55,000	$              60,000		E 20,000	$          95,000
Equity earnings from Company M	$      (630,000)		I 630,000		$                    -
Net income	$   (1,170,000)	$           (960,000)			$    (1,170,000)
Balance Sheet
Current assets	$         75,000	$            143,000			$        218,000
Accounts receivable	$       950,000	$            225,000			$     1,175,000
Inventories	$    1,700,000	$            785,000			$     2,485,000
Investment in Company M	$    6,580,000	$                        -	D 50,000	$ 2,455,000
				A 3,545,000	$                    -
				I 630,000
Equipment	$    3,700,000	$         2,052,000			$     5,752,000
Patents	$         95,000		A 2,250,000	E 250,000	$     2,095,000
Unpatented technology	$    2,125,000	$         1,450,000	A 700,000	E 100,000	$     4,175,000
Goodwill	$       425,000	$                        -	A 675,000		$     1,100,000
Total assets	$  15,650,000	$         4,655,000			$   17,000,000
Accounts payable	$      (500,000)	$             (90,000)			$       (590,000)
Long term debt	$   (1,000,000)	$        (1,200,000)	E 20,000	A 80,000	$    (2,260,000)
Common stock	$   (8,200,000)	$           (500,000)	$   500,000		$    (8,200,000)
Retained earnings	$   (5,950,000)	$        (2,865,000)			$    (5,950,000)
Total liabilities and equity	$ (15,650,000)	$        (4,655,000)	$7,130,000	$ 7,130,000	$  (17,000,000)

Table: (2)

Working note:

Statement of retained earnings	Company A	Company M	Debit	Credit	Consolidated Balances
Retained earnings on 01/01	$   (5,340,000)	$         1,955,000	$1,955,000		$    (5,340,000)
Net Income	$   (1,170,000)	$           (960,000)			$    (1,170,000)
Dividends declared	$       560,000	$              50,000		D 50.000	$        560,000
Retained earnings on 31/12	$   (5,950,000)	$        (2,865,000)			$    (5,950,000)

Table: (3)