4 he Holtz Corporation acquired 80 percent of the 100,000 outstanding voting sha
ID: 2332376 • Letter: 4
Question
4 he Holtz Corporation acquired 80 percent of the 100,000 outstanding voting shares of Devine, Inc., for $7.35 per share on January 1, 2017. The remaining 20 percent of Devine's shares also traded actively at $7.35 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 $70,000 and a fully amortized trademark with an estimated 10-year remaining life had a $70,000 fair value. At the acquisition date, Devine reported common stock of $100,000 and a retained earnings 10 polnts alance of $264,000. Following are the separate financial statements for the year ending December 31, 2018 eBook Holtz Devine, Inc. Corporation Sales Cost of goods sold Operating expenses $ (741,000) (371,000) 173,000 96,000 218,000 292,000 16,000 Print idend income Net income s (247,00e) (182,000) (792,000) (334,000) References Retained earnings, 1/1/18 Net income (above) Dividends declared (102,000) 20,000 s (989,000)s(416,000 (247,000) 50,000 Retained earnings, 12/31/18 Current assets Investment in Devine, Inc Buildings and equipment (net) Trademarks $468,0 176,90a 588,0080 842,500 123,000 379,000 233,000 $ 788,000 (712,5ee) (272,000) (100,000) (989,900(416,9e0) $ (2,021,500) (788,000) S 2,021,500 Total assets Liabilities Common stock Retained earnings, 12/31/18 (above) (320,000) Total liabilities and equities At year-end, there were no intra-entity receivables or payables. a. Prepare a worksheet to consolidate these two companies as of December 31, 2018 b. Prepare a 2018 consolidated income statement for Holtz and Devine c. If instead the noncontrolling interest shares of Devine had traded for $5.04 surrounding Holtz's acquisition date, what is the impact on goodwill?Explanation / Answer
a. Fair Value Allocation and Amortization
Consideration transferred by Holtz.................. $588,000
Noncontrolling interest fair value..................... 147,000
Devine total fair value 1/1/17.............................. $735,000
Devine book value 1/1/17.................................... (364,000)
Fair value in excess of book value .................. $371,000 Annual Excess
Life Amortizations
Excess price allocated to undervalued
Building............................................................. 70,000 5 years $14,000
Trademark ...................................................... 70,000 10 years 7,000
Goodwill............................................................ $231,000 indefinite -0-
$21,000
Explanation of Consolidation Entries Found on Worksheet
Entry *C: Convert the parent’s 1/1/18 retained earnings balance from the cash basis to the accrual basis.(334000-264000-21000) x 80% = 39200
Entry S: Eliminates stockholders' equity accounts of subsidiary while recognizing noncontrolling interest balance (20%) as of the beginning of the current year.
Entry A: Recognizes acquisition-date fair value allocations less 1 year amortization for building and trademark and increases beginning balance of the noncontrolling interest for its share.
Entry I: Eliminates intra-entity dividend payments recorded as income by parent.
Entry E: Recognizes amortization expense for current year.
Columnar entry—Recognizes noncontrolling interest's share of subsidiary's net income ($102,000 – 21,000) × 20%).
HOLTZ CORPORATION AND DEVINE, INC.
Consolidation Worksheet
For Year Ending December 31, 2018
Holtz DEVINE Consolidation Entries Noncontrolling Consolidated
Accounts Corporation Inc. Debit Credit Interest Totals
Sales (741,000) (371,000) (1,112,000)
Cost of goods sold 218,000 173,000 391,000
Operating expenses 292,000 96,000 (E) 21,000 409,000
Dividend income (16,000) ______ (I) 16,000 -0-
Separate company net income (247,000) (102,000)
Consolidated net income 312,000
NCI in Devine's income (16,200) 16,200
Holtz’s interest in consolidated income (295,800)
Retained earnings, 1/1 (792,000) (334,000) (S)334,000 (*C) 39,200 (831,200)
Net income (above) (247,000) (102,000) (295,800)
Dividends paid 50,000 20,000 (I) 16,000 4,000 50,000
Retained earnings, 12/31 (989,000) (416,000) (1,077,000)
Current assets 468,000 176,000 644,000
Investment in Devine 588,000 (*C) 39,200 (S)347,200 -0-
(A)280,000
Buildings and equipment (net) 842,500 379,000 (A) 56,000 (E) 14,000 1,263,500
Trademarks 123,000 233,000 (A) 63,000 (E) 7,000 412,000
Goodwill 0 0 (A)231,000 231,000
Total assets 2,021,500 788,000 2,550,500
Liabilities (712,500) (272,000) (984,500)
Common stock (320,000) (100,000) (S)100,000 (320,000)
Retained earnings, 12/31 (above) (989,000) (416,000) (1,077,000)
NCI in Devine, 1/1 (S) 86,800
(A) 70,000 (156,800)
NCI in Devine, 12/31 148,000 (169,000)
Total liabilities and equities (2,021,500) (788,000) 860,200 860,200 (2,550,500)
b. HOLTZ CORPORATION AND DEVINE, INC.
Consolidated Income Statement
For Year Ending December 31, 2018
Sales $1,112,000
Cost of goods sold $391,000
Operating expenses 409,000
Total expenses 800,000
Consolidated net income $312,000
To 20% noncontrolling interest $16,200
To controlling interest $295,800
c. Consideration transferred by Holtz for 80% of Devine $588,000
Noncontrolling interest fair value ($5.04 × 20,000 shares) 100,800
Devine fair value $688,800
Fair value of Devine’s underlying net assets 504,000
Goodwill $184,800
If the noncontrolling interest fair value was $5.04 per share at the acquisition date, then goodwill declines to $184,800
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