Background information Pound Company purchased 80% of the common stock of Sterling Inc. on April 1, 2019 for $6,000,000. The fair value of the remaining 20% of the common stock was $1,500,000 on that date. Also, at the acquisition date, the book values and fair values of Sterling’s assets and liabilities were as follows: Book Value Fair Value Cash $200,0000 $200,000 Notes receivable 85,000 85,000 Accounts Receivable, net 980,000 980,000 Inventories 828,000 700,000 Land 1,560,000 2,100,000 Equipment 7,850,000 10,600,000 Accumulated Depreciation (3,250,000) (4,000,000) Other assets 140,000 50,000 $8,393,000 $10,715,000 Notes payable $115,000 $115,000 Accounts payable 400,000 400,000 Subordinated debentures (7%) 5,000,000 5,000,000 Common stock; par value $10 per share; authorized, issued, outstanding 100,000 shares 1,000,000 -- Additional paid-in capital 872,000 -- Retained earnings 1,006,000 -- $8,393,000 Additional information, including transactions that had occurred by the end of the year, December 31, 2019. The inventory on the books of Sterling on April 1 had been charged to cost of goods sold. Prior to April 1, 2019, Pound had purchased, at face value, $1,500,000 of Sterling’s 7% subordinated debentures. These debentures on October 31, 2026, with interest payable annually on October 31. As of the acquisition date, the Equipment had a remaining estimated useful life of six years. Sterling uses the straight-line method of depreciation. The appropriate adjustment to Depreciation Expense for Equipment (i.e., the debit side of the [E] entry) is $236,250. The Other Assets listed above consist entirely of long-term investments made by Sterling and do not include any investment in Pound. During the period April 1 to December 31, 2019, the following intercompany transactions occurred between Pound and Sterling: Intraentity sales Pound to Sterling Sterling to Pound Sales $158,000 $230,000 Included in buyer’s inventory at December 31, 2019 36,000 12,000 Balance unpaid at December 31, 2019 16,800 22,000 Pound sells merchandise to Sterling at cost. Sterling sells merchandise to Pound at regular selling price which includes a normal gross profit margin of 35 percent. There were no intraentity sales between the two companies prior to April 1, 2019. Any accrued interest on intercompany debt is recorded by each company in their respective accounts payable and accounts receivable accounts. 3 Background Information (concluded) Pound’s revenue and expense balances are for the twelve months ended December 31, 2019. Sterling’s balances in these accounts are for the nine month period beginning April 1, 2019. The balance sheet account balances are as of December 31, 2019. Debits Pound Sterling Cash $822,000 $530,000 Notes receivable -- 85,000 Accounts receivable, net 2,758,000 1,368,400 Inventories 3,204,000 1,182,000 Land 4,000,000 1,560,000 Equipment 15,875,000 7,850,000 Accumulated depreciation, equipment (6,301,000) (3,838,750) Buildings 1,286,000 -- Accumulated depreciation, buildings (372,000) -- Investment in Sterling 6,000,000 -- Investment in Sterling bonds 1,500,000 -- Other assets 263,000 140,000 Goodwill Notes payable -- (115,000) Accounts payable (1,364,000) (204,000) Long-term debt (10,000,000) -- Subordinated debentures—7% -- (5,000,000) Common stock (2,400,000) (1,000,000) Additional paid-in capital (240,000) (872,000) Retained earnings (12,683,500) (1,006,000) Noncontrolling interest Sales (18,200,000) (5,760,000) Cost of goods sold 10,600,000 3,160,000 Selling, general, and admin. Expense 3,448,500 1,063,900 Depreciation expense, equipment 976,000 588,750 Depreciation expense, buildings 127,000 -- Equity in income of Sterling Interest revenue (105,000) (1,700) Interest expense 806,000 269,400 4 Required Create an Excel spreadsheet that includes all of the items listed (1 through 4) below. You can use the Consolidation Practice Worksheet Solution (located in the Week 14 module) as a guide to formatting your worksheets. However, DO NOT USE THAT Excel file. Each student is required to create their own new file in Excel beginning with a blank file. The use of any existing file, rather than a new file, will result in a score of zero on the assignment. Also, as mentioned above, this is an individual assignment and any evidence of sharing files with another individual will be considered a violation of academic integrity and will be referred to the relevant Chico State authorities. 1. (10 points) In one worksheet, prepare a consolidation spreadsheet using the December 31, 2019 pre-closing trial balance information for Pound and Sterling provided at the previous page. The equity method entry should be added to this trial balance. That will result in the addition of an Equity in the Income of Sterling account and an increase in the balance of the existing Investment in Sterling account. 2. (15 points) Program formulas in additional worksheets that result in the following consolidated financial statements: Income Statement; Statement of Retained Earnings; Balance Sheet (see format, Exhibit 4.7 on p. 173) 3. Prepare schedules that compute the following (10 points each): a. Goodwill (as computed on April 1, 2019) (see formats on p. 57 and p. 163) b. Equity income from Sterling (for the nine months ended April 1, 2019) (see format on p. 244) c. Investment in Sterling as of December 31, 2019 d. Income attributable to the noncontrolling interest (for 2019) e. Noncontrolling interest as of December 31, 2019 (see format on p. 245) 4. (25 points) Prepare a separate list of the consolidating entries, properly labeled, that are included in the consolidation spreadsheet. *G, *TL, *TA, S, A1, A2, I, D, E, TI, TL, TA, G, ED, P [note: it may be the case that some of these entries are not necessary]