Alternative Investment Methods, Goodwill Impairment, and Consolidated Financial Statements

In this project, you are to provide an analysis of alternative accounting methods for controlling interest investments and subsequent effects on consolidated reporting. The project requires the use of a computer and a spreadsheet software package (e.g., Microsoft Excel, etc.). The use of these tools allows you page 152to assess the sensitivity of alternative accounting methods on consolidated financial reporting without preparing several similar worksheets by hand. Also, by modeling a worksheet process, you can develop a better understanding of accounting for combined reporting entities.

Consolidated Worksheet Preparation

You will be creating and entering formulas to complete four worksheets. The first objective is to demonstrate the effect of different methods of accounting for the investments (equity, initial value, and partial equity) on the parent companys trial balance and on the consolidated worksheet subsequent to acquisition. The second objective is to show the effect on consolidated balances and key financial ratios of recognizing a goodwill impairment loss.

The project requires preparation of the following four separate worksheets:

- Consolidated information worksheet (follows).

- Equity method consolidation worksheet.

- Initial value method consolidation worksheet.

- Partial equity method consolidation worksheet.

If your spreadsheet package has multiple worksheet capabilities (e.g., Excel), you can use separate worksheets; otherwise, each of the four worksheets can reside in a separate area of a single spreadsheet.

In formulating your solution, each worksheet should link directly to the first worksheet. Also, feel free to create supplemental schedules to enhance the capabilities of your worksheet.

Project Scenario

Pecos Company acquired 100 percent of Suaros outstanding stock for $1,450,000 cash on January 1, 2017, when Suaro had the following balance sheet:

At the acquisition date, the fair values of each identifiable asset and liability that differed from book value were as follows: Land $ 80,000 Brand name 60,000 (indefinite lifeunrecognized on Suaros books) Software 415,000 (2-year estimated remaining useful life) In-process R&D 300,000

Additional Information

Although at acquisition date Pecos expected future benefits from Suaros in-process research and development (R&D), by the end of 2017 it became clear that the research project was a failure with no future economic benefits.

During 2017, Suaro earns $75,000 and pays no dividends.

Selected amounts from Pecos and Suaros separate financial statements at December 31, 2018, are presented in the consolidated information worksheet. All consolidated worksheets are to be prepared as of December 31, 2018, two years subsequent to acquisition.

Pecoss January 1, 2018, Retained Earnings balancebefore any effect from Suaros 2017 incomeis $(930,000) (credit balance).

Pecos has 500,000 common shares outstanding for EPS calculations and reported $2,943,100 for consolidated assets at the beginning of the period.

Project Requirements

Complete the four worksheets as follows:

1. Input the consolidated information worksheet provided and complete the fair-value allocation schedule by computing the excess amortizations for 2017 and 2018.

2. Using separate worksheets, prepare Pecoss trial balances for each of the indicated accounting methods (equity, initial value, and partial equity). Use only formulas for the Investment in Suaro, the Income of Suaro, and Retained Earnings accounts.

3. Using references to other cells only (either from the consolidated information worksheet or from the separate method sheets), prepare for each of the three consolidation worksheets:

-Adjustments and eliminations.

-Consolidated balances.

4. Calculate and present the effects of a 2018 total goodwill impairment loss on the following ratios for the consolidated entity:

-Earnings per share (EPS).

-Return on assets.

-Return on equity.

-Debt to equity.

*Your worksheets should have the capability to adjust immediately for the possibility that all acquisition goodwill can be considered impaired in 2018.

5. Prepare a word-processed report that describes and discusses the following worksheet results:

-The effects of alternative investment accounting methods on the parents trial balances and the final consolidation figures.

-The relation between consolidated retained earnings and the parents retained earnings under each of the three (equity, initial value, partial equity) investment accounting methods.

*The effect on EPS, return on assets, return on equity, and debt-to-equity ratios of the recognition that all acquisition-related goodwill is considered impaired in 2018. ****** Please help.

Assets Liabilities and Equity Liabilities... $(422,000) Cash Receivables Inventory Land.... Equipment (net). Software Total assets $ 37,000 82,000 149,000 90,000 225,000 315,000 $898,000 Common stock Retained earnings. (350,000) (126,000) Total liabilities and equity ... $1898,000)

B D 1 December 31, 2018, trial balances 2 3 4 Revenues 5 Operating expenses 6 Goodwill impairment loss 7 Income of Suaro Pecos $(1,052,000) 821,000 ? Suaro $(427,000) 262,000 ? 8 Net income ? $(165,000 9 ? 10 Retained earnings-Pecos 1/1/18 11 Retained earningsSuaro 1/1/18 12 Net Income (above) 13 Dividends declared ? (201.000) (165,000) 35,000 $(331,000) 200,000 ? 14 Retained earnings 12/31/18 15 16 Cash 17 Receivables 18 Inventory 19 Investment in Suaro 20 21 195,000 247.000 415,000 95,000 143,000 197,000 22 23 Land 341,000 85,000 240.100 100.000 312,000 24 Equipment (net) 25 Software 26 Other intangibles 27 Goodwill 28 Total assets 145,000 ? $ 932.000 29 30 Liabilities 31 Common stock 32 Retained earnings (above) 33 Total liabilities and equity (1,537.100) (500,000) ? (251,000) (350,000) (331,000) $(932,000 ? 34 35 Fair-value allocation schedule 36 Price paid 37 Book value 1,450,000 476,000 38 Excess initial value 39 to land 40 to brand name 974.000 (10,000) 60,000 Amortizations 2017 ? 2018 ?

A B D ? ? 100,000 300,000 524.000 ? ? ? ? 41 to software 42 to IPR&D 43 to goodwill 44 45 Suaro's RE changes 46 2017 47 2018 Income 75,000 165,000 Dividends 0 35,000