The condensed balance sheets for Rice & Associates and Rachel Company as of Dece

Question

The condensed balance sheets for Rice & Associates and Rachel Company as of December 30, 2016 are shown in Exhibit 1. On December 31, 2016, Rice & Associates purchased 80.0 percent of Rachel Company for $140,000 by issuing 50,000 shares of its previously authorized common stock. As of December 31, 2016, the fair values of Rachel Company’s assets and liabilities are shown below, including customer lists, an intangible asset identified during the acquisition:

Cash $10,000

Accounts receivable 40,000

Inventory 70,000

Property, plant and equipment 120,000

Customer lists 10,000

Accounts payable 15,000

Long-term liabilities 65,000

Required:

a. Prepare a consolidated balance sheet immediately after the acquisition on December 31, 2016.

b. Will an account called “investment in Rachel Company” appear as an asset in Rice & Associate’s un-consolidated balance sheet? (circle one) Yes or No? Explain.

c. Will an account called “investment in Rachel Company” appear as an asset in Rice & Associate’s consolidated balance sheet? (circle one) Yes or No? Explain.

d. Will an account called “goodwill” appear as an asset in Rice & Associates un-consolidated balance sheet? (circle one) Yes or No? Explain.

e. Will an account called “goodwill” appear as an asset in Rachel Company’s un-consolidated balance sheet? (circle one) Yes or No? Explain.

EXHIBIT 1 RICE & ASSOCIATES AND RACHEL BALANCE SHEETS Before Acquisition of Rachel Rice Before Issue Stock Assets for Rachel Rachel Cash $56,000 $10,000 Accounts receivable        150,000           40,000 Inventory        300,000           40,000 Property, plant & equipment        400,000         130,000 Total assets $906,000 $220,000 Liabilities & Stockholder's Equity Accounts payable $80,000 $20,000 Long-term liabilities        300,000           50,000 Common stock, par value $1        350,000           90,000 Capital paid in excess of par value          50,000           10,000 Retained earnings        126,000           50,000 Total liabilities & stockholder's equity $906,000 $220,000

Explanation / Answer

Investment entry:

Consolidation elimination entry:

Fair value of entity= 140000/80%= 175000

Minority interest = 175000*20%= 35000

assets are adjusted to fair value on consolidation in the above entry

Rice Rachel Investment entry Adjustments Consolidation amount Cash 56,000.00 10,000.00               66,000 Accounts receivable 1,50,000.00 40,000.00           1,90,000 Inventory 3,00,000.00 40,000.00 30000           3,70,000 Investment in rachel company 140000 -140000                        -   Goodwill 5000                 5,000 Customer lists 10000               10,000 Property, plant & equipment 4,00,000.00 1,30,000.00 -10000           5,20,000 Total assets 9,06,000.00 2,20,000.00 1,40,000.00       -1,05,000       11,61,000 Liabilities & Stockholder's Equity Accounts payable 80,000.00 20,000.00 -5000               95,000 Long-term liabilities 3,00,000.00 50,000.00 15000           3,65,000 Minority interest 35000               35,000 Common stock, par value $1 3,50,000.00 90,000.00 50000 -90,000.00           4,00,000 Capital paid in excess of par value 50,000.00 10,000.00 90000 -10,000.00           1,40,000 Retained earnings 1,26,000.00 50,000.00 -50,000.00           1,26,000 Total liabilities & stockholder's equity 9,06,000.00 2,20,000.00 1,40,000.00 -1,05,000.00         11,61,000

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