Business combination:
Business combination refers tothe combining of one or more business organizations in a single entity. The business combination leads to the formation of combined financial statements. After business combination, the entities having separate control merges into one having control over all the assets and liabilities. Merging and acquisition are types of business combinations.
Consolidated financial statements:
The consolidated financial statements refer to the combined financial statements of the entities which are prepared at the year-end. The consolidated financial statements are prepared when one organization is either acquired by the other entity or two organizations merged to form the new entity.The consolidated financial statements serve the purpose of both the entities about financial information.
Value analysis:
The value analysis in a business combination is an essential part of determining the worth of the acquired entity. The
:
To prepare: Consolidated worksheet for Company P and Company S for the year ended December 31, 2016.
Explanation of Solution
Prepare the consolidated worksheet for Company P and Company S for the year ended December 31, 2016:
Company P and Company S | ||||||||
Consolidation Worksheet | ||||||||
Year ending December 31, 2016 | ||||||||
Adjustments | ||||||||
Particulars | Company P | Company S | Debit | Credit | Consolidated income | NCI | Consolidated Balances | |
Inventory | $105,000 | $90,000 | $4,800 | $190,200 | ||||
Cash | $92,400 | $53,200 | $145,600 | |||||
Accounts receivable | $150,600 | $90,000 | $6,000 | $234,600 | ||||
Land | $100,000 | $120,000 | $220,000 | |||||
Investment in Company S | $503,120 | $20,160(CY1) | ||||||
$8,000(CY2) | ||||||||
$336,960 | ||||||||
$154,000(D) | $0 | |||||||
Building | $800,000 | $250,000 | $100,000 | $1,150,000 | ||||
($250,000) | ($70,000) | $10,000 | ($330,000) | |||||
Plant and Equipment | $210,000 | $120,000 | $50,000 | $40,000 | $340,000 | |||
Accumulated Depreciation | ($115,000) | ($90,000) | $20,000 | |||||
$8,000 | ||||||||
$8,000 | ($209,000) | |||||||
Goodwill | $30,000 | $42,500 | $72,500 | |||||
Accounts payable | ($70,000) | ($40,000) | $6,000 | ($104,000) | ||||
Current tax liability | ($82,640) | ($16,800) | ($99,440) | |||||
Bonds payable | ($100,000) | ($100,000) | ||||||
($4,250) | $19,754 | |||||||
$2,702 | $18,206 | |||||||
Common stock (Company S) | ($10,000) | $8,000 | ($2,000) | |||||
Paid-in capital in excess of par (Company S) | ($190,000) | $152,000 | ($38,000) | |||||
Retained earnings (Company S) | ($221,200) | $176,960 | ||||||
$3,000 | ||||||||
$720 | ||||||||
$0 | $38,500 | |||||||
$288 | ($79,308) | |||||||
Common stock (Company P) | ($100,000) | ($100,000) | ||||||
Paid-in capital in excess of par (Company P) | ($600,000) | ($600,000) | ||||||
Retained earnings (Company P) | ($617,683) | $12,000 | ||||||
$2,880 | ||||||||
$32,000 | $19,466 | ($590,269) | ||||||
Sales | ($890,000) | ($350,000) | $30,000 | ($1,210,000) | ||||
Cost of goods sold | $480,000 | $220,000 | $4,800 | $30,000(IS) | ||||
$3,600(BI) | $671,200 | |||||||
Depreciation expense | $55,000 | $20,000 | $15,000 | |||||
$8,000 | $82,000 | |||||||
Other expenses | $150,000 | $60,000 | $210,000 | |||||
Interest expense | $8,000 | $8,000 | ||||||
Provision for tax | $83,613 | $16,800 | $2,702 | $97,711 | ||||
Subsidiary income | ($20,160) | $20,160(CY1) | ||||||
Dividend declared, Company S | $10,000 | $8,000(CY2) | $2,000 | |||||
Dividend declared, Company P | $20,000 | $20,000 | ||||||
$0 | $0 | |||||||
Consolidated net income | ($141,089) | $0 | ||||||
NCI | $ 1,896 | ($1,896) | ||||||
Controlling interest | ($139,193) | ($139,193) | ||||||
Total NCI | ($119,204) | ($119,204) | ||||||
Retained earnings of Controlling Interest | ($709,462) | ($709,462) | ||||||
Total | $702,476 | $702,476 | $0 |
Table: (1)
Income Distribution Schedule of Company S | |
Particulars | Amount |
Net income (internally generated) | $ 42,000 |
Less: Amortization | $ (15,000) |
Less: Unrealized profit in ending inventory | $ (4,800) |
Less: Gain on equipment | $ 3,600 |
Adjusted income | $ 25,800 |
Provision for tax | $ (11,520) |
Net income | $ 14,280 |
Non-controlling share of Company S | $ (1,896) |
Controlling interest share | $ 12,384 |
Table: (2)
Income Distribution Schedule of Company P | |
Particulars | Amount |
Net income (internally generated) | $ 205,000 |
Add: Gain realized in current year | $ 8,000 |
Adjusted income | $ 213,000 |
Provision for tax | $ (85,200) |
Net income | $ 127,800 |
Share in adjusted income of Company S | $ 12,384 |
Tax charged on income of subsidiary | $ (991) |
Controlling share of Company P | $ 139,193 |
Table: (3)
Working note 1:
Particulars | Controlling interest | NCI | Total |
Adjusted income(Total) | $ 20,640 | $ 5,160 | $ 25,800 |
Share of NCI in adjustment of assets | $ - | $ 3,000 | $ 3,000 |
Taxable income | $ 20,640 | $ 8,160 | $ 28,800 |
Tax @40% | $ 8,256 | $ 3,264 | $ 11,520 |
Share of income after tax | $ 12,384 | $ 1,896 | $ 14,280 |
Table: (4) Working note 2:
Adjustments and eliminations:
- CY1: Income of subsidiary eliminated which is about the current year.
- CY2: The dividend of the current year eliminated.
- EL: The interest of Company P eliminated from the equity of the subsidiary.
- D: the excess of fair value distributed to NCI and Controlling interest.
- A: Amortization expense eliminated.
- IS: Inter-company sales eliminated.
- BI: The unrealized profit in beginning inventory eliminated.
- EI: Profit in ending inventory eliminated.
Working note 3:
Particulars | Controlling interest | NCI | Total |
To beginning retained earnings: | |||
Subsidiary transactions: | |||
Beginning inventory | $2,880 | 720 | $ 3,600 |
Remaining profit in fixed asset | |||
Amortization | $12,000 | 0 | $ 12,000 |
Total | $14,880 | $720 | $ 15,600 |
First tax | $5,952 | $288 | $ 6,240 |
Second tax | $714 | $0 | $ 714 |
Parent transactions: | $ - | ||
Beginning inventory | $0 | $0 | $ - |
Remaining profit in fixed asset | $ 32,000 | ||
Total | $ 32,000 | ||
First tax | 12800 | $(12,800) | |
Total retained earnings adjustments | $19,466 | $288 | $19,754 |
To current year: | |||
Subsidiary transactions: | |||
Beginning inventory | ($2,880) | -720 | $ (3,600) |
Ending inventory | $3,840 | 960 | $ 4,800 |
Sale of fixed assets | $0 | 0 | $ - |
Realized profit on fixed assets | 0 | 0 | $ - |
Amortization | $12,000 | 0 | $ 12,000 |
Total | $12,960 | $240 | $ 13,200 |
First tax | $5,184 | $96 | $ 5,280 |
Second tax | $622 | $0 | $ 622 |
Parent transactions: | $ - | ||
Beginning inventory | $0 | $0 | $ - |
Ending inventory | $0 | $0 | $ - |
Sale of fixed assets | $0 | $0 | $ - |
Realized profit on fixed assets | $ (8,000) | ||
Total | $ (8,000) | ||
First tax | -3200 | $ (3,200) | |
Total retained earnings adjustments | $2,606 | $96 | $2,702 |
Table: (5)
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