The Holtz Corporation acquired 80 percent of the 100,000 outstanding voting shar
ID: 2508995 • Letter: T
Question
The Holtz Corporation acquired 80 percent of the 100,000 outstanding voting shares of Devine, Inc., for $7.30 per share on January 1, 2017. The remaining 20 percent of Devine’s shares also traded actively at $7.30 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 $64,500 and a fully amortized trademark with an estimated 10-year remaining life had a $84,000 fair value. At the acquisition date, Devine reported common stock of $100,000 and a retained earnings balance of $333,500.
Following are the separate financial statements for the year ending December 31, 2018:
At year-end, there were no intra-entity receivables or payables.
Prepare a worksheet to consolidate these two companies as of December 31, 2018.
Prepare a 2018 consolidated income statement for Holtz and Devine.
If instead the noncontrolling interest shares of Devine had traded for $5.82 surrounding Holtz’s acquisition date, what is the impact on goodwill?
HoltzCorporation Devine,
Inc. Sales $ (674,000 ) $ (340,250 ) Cost of goods sold 233,000 166,000 Operating expenses 275,000 83,250 Dividend income (16,000 ) 0 Net income $ (182,000 ) $ (91,000 ) Retained earnings, 1/1/18 $ (783,000 ) $ (403,500 ) Net income (above) (182,000 ) (91,000 ) Dividends declared 70,000 20,000 Retained earnings, 12/31/18 $ (895,000 ) $ (474,500 ) Current assets $ 301,000 $ 196,500 Investment in Devine, Inc 584,000 0 Buildings and equipment (net) 825,000 423,000 Trademarks 115,000 181,000 Total assets $ 1,825,000 $ 800,500 Liabilities $ (610,000 ) $ (226,000 ) Common stock (320,000 ) (100,000 ) Retained earnings, 12/31/18 (above) (895,000 ) (474,500 ) Total liabilities and equities $ (1,825,000 ) $ (800,500 )
Explanation / Answer
Consolidated Income Statement as on December 31, 2018 Holtz Corporation Devine Inc. Consolidated Total (A) (B) (C=A+B) $ $ $ Sales 674000 340250 1014250 Less: Cost of goods sold -233000 -166000 -399000 Gross Profit 441000 174250 615250 Operating expenses -275000 -83250 -358250 Net Earnings from operations 166000 91000 257000 Add: Non-Operating Income Dividend income 16000 0 16000 Net income before tax 182000 91000 273000 Consolidated Statement of financial position as on December 31, 2018 Holtz Corporation Devine Inc. Eliminations Consolidated Debit Credit $ $ $ $ $ Assets Non Current Assets Investment in Devine Inc 584000 -584000 0 Buildings and equipment (net) 825000 423000 64500 1312500 Trademarks 115000 181000 84000 380000 1 1524000 604000 2128000 Current Assets 301000 196500 497500 2 301000 196500 497500 Total Assets 1+2 1825000 800500 148500 -584000 2190000 Equity & Liabilities Equity Common Stock - Holtz 320000 320000 - Devine 100000 -100000 0 3 320000 100000 -100000 320000 Retained earnings Opening earnings 783000 403500 1186500 Add: Income from consolidated statement 182000 91000 273000 Sub-total 965000 494500 1459500 Less: Dividends declared -70000 -20000 -90000 Closing earnings 4 895000 474500 -484000 885500 Liabilities 5 610000 226000 836000 Accumulated other comprehensive gain/loss 148500 148500 Total Equity & Liabilities 3+4+5 1825000 800500 -584000 148500 2190000 0 0 0 Adjustments for fair value of assets of Divine Inc Fair Value Unrealised Gain/Loss Builing 64500 64500 Trademarks 84000 84000 Total 148500 148500 If after acquisiton, the share value of Divine Inc trades at $5.82 instead of $ 7.30, then a goodwill impairment or goodwill decline entry will have to be passed in the income statement Rate $ Investment Original Investment 80000 7.3 584000 A (80% of 100000 Divine Inc shares) Share value after acquisiton 80000 5.82 465600 B Goodwill impairment -118400 A-B Holtz Corporation must record $118400 as expense in its income statement
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