International Technology Inc. (ITI) acquired all of the voting stock of Global Outsourcing Corporation (GOC) on June 30,2010, for $ 110 million in cash and stock, plus an earnings contingency payable at the end of the third year with a fair value of $2 million at the date of acquisition. Within the measurement period, the earnings contingency declined to a fair value of zero and the acquisition price was appropriately adjusted. Both companies have a June 30 year-end. At June 30,2010, GOC's total stockholders' equity was $40 million, as follows (in millions):
Common stock, par$ 4
Additional paid-in capital60
Retained earnings (deficit)(25)
Accumulated other comprehensive income3
Treasury stock(2)
Total$40
At the acquisition date, GOC's inventories were undervalued by $5 million, its property, plant and equipment was overvalued by $60 million, its reported patents and trademarks were undervalued by $10 million, and its long-term debt was undervalued by $3 million. GOC also had previously unreported identifiable intangibles: $5 million of advanced technology and $25 million of customer lists. GOC reports its inventory using the LIFO method, and purchases exceed sales every year. The acquisition date remaining lives of its assets and liabilities are as follows:
Property, plant and equipment, net20 years
Patents and trademarks5 years
Advanced technology5 years
Customer listsIndefinite
Long-term debt3 years
The straight-line method is used for definite life assets. Impairment losses on the customer lists were $2 million in fiscal 2012 and $4 million in fiscal 2013. Goodwill impairment losses were $2 million in fiscal 2011, $3 million in fiscal 2012, and $2 million in fiscal 2013.
GOC reported net income of $15 million in fiscal 2011, and a net loss of $2 million in fiscal 2012. Neither company pays dividends. ITI uses the complete equity method to account for its investment in GOC on its own books The trial balances of ITI and GOC at June 30,2013, are as follows:

Required
a. Prepare a schedule that computes the June 30, 2013, investment in GOC balance and 2013 equity in net income on ITI's books.
b. Use a working paper to consolidate the trial balances of ITI and GOC at June 30,2013.
c. Present the consolidated balance sheet at June 30,2013, and the consolidated statement of income and retained earnings for 2013.

Transcribed Image Text:

Dr (Cr) (in millions) TI GOC $ 12 140 600 1,100 127 (175) Property, plant and equipment, net..r. .u... Investment in GOC.S.. Current liablities.ARASPARRE. Long-term liabilities Common stock, par Additional paid-in capital Retained earnings, July Accumulated other comprehensive income. . . . . … . . . .. . . . . . . . . . . … Treasury stock (10) 125 (105) (22) ...(580) (118) (60) (20) (2,000) (900) Equity in net income of GOC... Cost of goods sold Operating expenses Totals .PPRNNA1,400 580 800 n 0