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 mature 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.
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
|
|
|
|
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 December 31, 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]