Chapter 4 inclass exercises PDF

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practice problems for this chapter of the textbook for business finance 2 course....

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Example 1a: If a parent pays $50 per share for 80% of a subs stock (10,000 Shares) The other 20% of the shares (2,500) are trading for $48 per share, a. what is the total acquisition date fair value? b. If the fair value of the net identifiable net assets acquired was $600,000, what is goodwill?

Example 1B: If the fair value of the non-controlling interest is 112,500 (i.e., remaining shares are selling for $45 a share) a) What is the Total acquisition date fair value? b) What is good will? c) How will the goodwill be allocated between the parent and NCI? Answer: Example 1C—implied value of NCI shares: If the parent paid $50 for 80% of the shares (10,000), what is the implied value of the remaining shares?

Example 2: Acquisition of less than 100%, plus acquisition part-way through year: Parker Inc. acquires 70 percent of Sawyer Company for $420,000. The remaining 30 percent of Sawyer’s outstanding shares continue to trade at a collective value of $174,000. On the acquisition date, Sawyer has the following accounts: Book Value

Fair Value

Current assets

210,000

210,000

Land

170,000

180,000

Buildings

300,000

330,000

Liabilities

(280,000)

(280,000)

The buildings have a 10-year life. In addition, Sawyer holds a patent worth $140,000 that has a five-year life but is not recorded on its financial records. At the end of the year, the two companies report the following balances: Parker

Sawyer

Revenues

(900,000)

(600,000)

Expenses

600,000

400,000

a. Assume that the acquisition took place on January 1. What figures would appear in a consolidated income statement for the year? b. Assume that the acquisition took place on April 1. Sawyer’s revenues and expenses occurred uniformly throughout the year. What amounts would appear in a consolidated income statement for the year?

Example 3 On January 1, 2017, Teleconnect acquires 70 percent of Bandmor for $490,000 cash. The remaining 30 percent of Bandmor’s shares continued to trade at a total value of $210,000. The new subsidiary reported common stock of $300,000 on that date, with retained earnings of $180,000. A patent was undervalued in the company’s financial records by $30,000. This patent had a 5-year remaining life. Goodwill of $190,000 was recognized and allocated proportionately to the controlling and non-controlling interests. On December 31, 2019, Telconnect owes $22,000 to Bandmor. Bandmor earns income and pays cash dividends as follows: Year Net Income Dividends 2017 75,000 39,000 2018 96,000 44,000 2019 110,000 60,000 a. What are the consolidation entries needed as of December 31, 2019? b. What noncontrolling interest balances will appear in consolidated financial statements?

Example 4: Non-controlling net income and end of year total non-controlling interest. On January 1. Beckman Inc. acquires 60 percent of the outstanding stock of Calvin for $36,000. Calvin Co. has one recorded asset, a specialized production machine with ah book value of $10,000 and no liabilities. The fair value of the machine is $50,000, and the remaining useful life is estimated to be 10 years. Any remaining excess fair value is attributable to an unrecorded process trade secret with an estimated future life of 4 years. Calvin’s total acquisition-date fair value is $60,000. At the end of the year, Calvin reports the following in its financial statements: Revenues

$50,000

Expenses

20,000

Net Income

30,000

Dividends paid

5,000

Machine

9,000

Other assets

26,000

Total Assets

35,000

Common Stock

10,000

Retained earnings

25,000

Total Equity

35,000

Determine the amounts that Beckman should report in its consolidated financial statements for non-controlling interest in subsidiary income, end of year total non-controlling interest, Calvin’s machine (net of accumulated depreciation) and the process trade secret.

Example 5: Step Acquisition On January 1, 2020, Bretz, Inc., acquired 60 percent of the outstanding shares of Keane Company for $573,000 in cash. The price paid was proportionate to Keane’s total fair value although at the date of acquisition, Keane had a total book value of $810,000. All assets acquired and liabilities assumed had fair values equal to book values except for a copyright (six-year remaining life) that was undervalued in Keane’s accounting records by $120,000. During 2020, reported net income of $150,000 and paid cash dividends of $80,000. On January 1, 2021, Bretz bought an additional 30 percent interest in Keane for $300,000. Keane issued no additional capital stock during either 2020 or 2021. The following financial information is for these two companies on 12/31/2021. Bretz, Inc

Keane Company

Revenues

(402,000)

(300,000)

Expenses

200,000

120,000

Equity in Keane’s earnings

(144,000)

0

Net Income

(346,000)

(180,000)

Retained earnings1/1

(797,000)

(500,000)

Net income (above)

(346,000)

(180,000)

Dividends Paid

143,000

60,000

Retained earnings12/3 1

(1,000,000 )

(620,000)

NCI in Sub NI

Current assets 224,000

190,000

Investment in Keane Co.

994,500

0

Trademarks

106,000

600,000

Copyrights

210,000

300,000

Equipment

380,000

110,000

Debit

Credits

NCI

Consolidate d Totals

(net) Goodwill Total assets

1,914,500

1,200,000

Liabilities

(453,000)

(200,000)

Common Stock

(400,000)

(300,000)

APIC

(60,000)

(80,000)

APIC step acquisition

(1,500)

0

Retained earnings 12/31

(1,000,000 )

(620,000)

(1,914,500 )

(1,200,000 )

NCI in Sub 12/31 Total liabilities and equities

a. Show the journal entry Bretz made to record its January 1, 2021, acquisition of an additional 30 percent of Keane Company shares. b. Prepare a schedule showing how Bretz determined the Investment in Keane Company balance as of December 31, 2021. c. Prepare a consolidated worksheet for Bretz, Inc., and Keane Company for December 31, 2021....