Question: On April 1, Year 1, Company P
On April 1, Year 1, Company P purchased 85% of S Company for total consideration of $357,000, which included $30,000 of contingent consideration as measured according to GAAP at fair value. Each company has a December 31 year-end. The cost method is used to account for the investment in S. The income statements, balance sheets, and the statements of cash flows for relevant time periods are reported below along with consolidated numbers. On the acquisition date, land on Company S’s books is undervalued by $40,000. Any remaining excess of purchase price over fair value of net assets is attributed to goodwill. At the end of Year 1, Company S declared, but did not pay, a $30,000 dividend. The contingent consideration had increased in fair value to $36,600 as of December 31, Year 1. The financial statements are presented below.
Required:
1. Prepare the computation and allocation of difference between implied and book value acquired schedule on the date of acquisition.
2. Prepare the consolidated workpaper for year 1.
3. Examine the consolidated statement of cash flows prepared using the indirect format. Determine how the following amounts were computed and indicate the direction of the change in the account and the effect of the change on cash from operations.
a. Controlling interest in income, $148,620
b. Cash paid for acquisitions, $320,400
c. The change in accounts receivable, $15,300
d. The change in inventory, ($15,600)
e. The change in accounts and notes payable, $61,500
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Three Months ending April Ist, Year For the Year ending Income Statement December 31, Yea I P Ca. S Co. P Co. SCo Consolidat cd Revenue 315,000 195,000 1,260,000 780,000 1,845,000 Dividend income 25.500 Total Revenue 315,000 195,000 1,285,500 780,000 1,845,000 Cost of goods sold Selling, General & Administration 231,000 113,100 924,000 452,400 1,263,300 192,000 57,600 48,000 24000 156,000 324,000 Other ex penses 14,400 13.500 54,000 98,100 Total ex penses 293,400 150,600 1,173,600 662,400 1,685,400 Consolidatd Income 159,600 Noncontrolling intrest Income to Retained Earning (10,980) 21,600 44,400 111.900 117,600 148,620 Beginning Retainedcarnings 213,000 144,600 213,000 144,600 213,000 Net income 21,600 44,40) 111,900 117,600 148,620 Dividends declared 30,000 -0- Ending Retained camings 234,600 189p00 324,900 232,200 361,620 009'60I 000'PORS 000'6LI'IS O08' LZ $421,200 000'PORS $485,400 009'I 000'E I7 000'68I Retained Earnings 000'E 1Z 234,600 Other Cortributed Capital Capital Sock, $5 par Value Noncontrolling Interest 324,900 00' IZ I 000 OS 000 OS 000 291 OE' IZI OE' IZI 000 OS 000'291 000' te 000'ZEI 000'r7 000' te 000 791 Dividends Pay able Cortingent Consi deration Accounts and No tes Payable 9,480 000 0E 000 0E 000 0E 36,600 00t'91 IS 00t 10IS 000'6ES 000'6ES 000' SLS 009 E6 00I' 16IS 009' S60' I 000'r08S Total 009' 6LI'IS 008 LZ $421,200 00E' 89E' IS $485 400 000'0IS 000'0IS 000'OLZ Property and Equi pment 000o1s 00' IIE 0006L7 000' E16 561,600 Goodwill 000 LSE 000' LSE Investment in S Company 00t LEI 00z' EL 000'ZEI Inventory 000 8L 009 69 217,200 Dividends Receivable 25,500 00069 78,300 000 SIS 000 18 102,000 72,600 000'09s 159,300 008 91 000 6s 000'09s 000'SIS 009 9 000 EES S Co. I VIERI P Co. I A'I ady S Co. P Co. 12/31/Year0 P Co. Balance Sheet Consolidaed Statement of Cash Flows For Year Ending 12/31/Year 1 PCompany S Company Consolidated Net income 111,900 117,600 159,600 Depreciation 40,000 45000 73,750 Change in following accounts: Accounts Reccivable 23,700 (12,000) 15,300 Dividends Receivabks (25,300) Inventory (7,200) (4,800) (15,600) (23,400) Accounts and Notes Payable Contingent Consideration Cash from Operations 77,100 $61,500 6,600 6,600 301,150 226,600 122,400 Investing Purchase Property, Plant & Equipment Acquisitions (86,400) (157,750) (320,400) (91,600) (327,000) (418,600) (S86,400) Cash from Investing Activities (478,150) Financing Issue (retire) Debt or Stock 150,000 150,000 Cash Dividends Paid (30,000) Cash from Financing Activities 150,000 (30,000) 150,000 Change in Cash ($42,000) $6,000 ($27,000)
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