5 Padre, Inc., buys 80 percent of the outstanding common stock of Sierra Corpora

Question

5 Padre, Inc., buys 80 percent of the outstanding common stock of Sierra Corporation on January 1, 2018, for $757,280 cash. At the acquisition date, Sierra's total fair value, including the noncontrolling interest, was assessed at $946.600 although Sierra's book value was only $696,000. Also, several individual items on Sierra's financial records had fair values that differed from their book values as follows: 10 points Land Buildings and equipment (18-year remaining life) Copyright (28-year remaining life) Notes payable (due in 8 years) Book Value Fair Value $66,308 251,3ee 248,8e8 386,888 (165,488) 294,8e8 192,8ee (177,8e8) For internal reporting purposes, Padre, Inc., employs the equity method to account for this investment. The following account balances are for the year ending December 31, 2018, for both companies. Padre Revenues Cost of goods sold Depreciation expense Amortization expense Interest expense Equity in income of Sierra $ (1,447,268) (649,588) 423,8e8 18,488 9,688 6,508 755,808 348,808 44,788 152,44e Net income $(46e,8) (192,e08) Retained earnings, 1/1/18 Net income Dividends declared $ (1,382,58) (536,808) (192,ee8) 65,868 $ (1,582,580) (663,808) (468,808) 26a,8e8 Retained earnings, 12/31/18 Current assets Investment in Sierra Land Buildings and equipment (net) Copyright $ 913,788 671,78e 857,728 358,808 878,800 66,308 275,688 182,488 Total assets $ 2,991,588 $1,196,808 Accounts payable Notes payable Common stock Additional paid-in capital Retained earnings (above) $ (192, (196,808) (177,e0e) (18e,8e8) (6e,8e8) (1.582.590)(663,eee) $ (2,991,580) $(1,196,808) (467,888) (38e,808) (459,888) Total liabilities and equities At year-end, there were no intra-entity receivables or payables. Using the acquisition method, prepare the worksheet to consolidate these two companies. (For accounts where multlple c nsolidatlon entries are required, c mbine all debit entrie$ into one m unt and enter this amount In the debit column f the worksheet. SImllerly, comblne all credlt entrles Into one amount and enter this amount In the credlt column of the worksheet. Amounts In the Deblt and Credit columns should be entered as posltlve. Negatlve amounts for the NoncontrollIng Interest and Consolldated Totals columns should be entered with a mlnus slgn.)

Explanation / Answer

Prepare the consolidated worksheet as follows:

Notes:

$909,720 = (($250,600 × 80%) + ($696,000 × 80%) + $152,440)

$38,110 = ($192,000 + $5,400 $5,400 1,450) × 20%

$214,430 = $139,200 + $50,200 + $38,110 $13,000

Particulars Parent Sub Debit Credit Non-controlling Consolidated Revenues ($1,447,260) ($649,500) ($2,096,760) Cost of goods sold $755,000 $423,000 $1,178,000 Depreciation expense $340,000 $18,400 $5,400 $353,000 Amortization expense $0 $9,600 $5,400 $15,000 Interest expense $44,700 $6,500 $1,450 $52,650 Equity in income of subsidiary ($152,440) $152,440 Net income ($460,000) ($192,000) Consolidated net income ($498,110)          Net income to non-controlling interest (192,0001,450) × 20% ($38,110) $38,110          Net income to parent company ($460,000) Retained earnings - Beginning balance ($1,382,500) ($536,000) $536,000 ($1,382,500) Net income ($460,000) ($192,000) ($460,000) Dividends declared $260,000 $65,000 $52,000 $13,000 $260,000 Retained earnings - Ending balance ($1,582,500) ($663,000) ($1,582,500) Current assets $913,780 $671,700 $1,585,480 Investment in subsidiary $857,720 $0 $52,000 $909,720 $0 Land $350,000 $66,300 $185,000 $601,300 Buildings and equipment $870,000 $275,600 $5,400 $54,000 $1,097,000 Copyright $0 $182,400 $108,000 $5,400 $285,000 Total assets $2,991,500 $1,196,000 $3,568,780 Accounts payable ($192,000) ($196,000) ($388,000) Notes payable ($467,000) ($177,000) $11,600 $1,450 ($633,850) Non-controlling interest in subsidiary-beginning balance (696,000×20%) $139,200 Non-controlling interest in subsidiary-ending balance (250,600×20%) $50,120 ($214,430) ($214,430) Common stock ($300,000) ($100,000) $100,000 ($300,000) Additional paid-in capital ($450,000) ($60,000) $60,000 ($450,000) Retained earnings ($1,582,500) ($663,000) ($1,582,500) Total liabilities and Equities ($2,991,500) ($1,196,000) $1,217,290 $1,217,290 ($3,568,780)

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