Case 4.2

Stark acquired 55% of Small's common shares issuing 500,000 shares with market value of $1.25 per share on December 31, 2018. On that date, Small's non-controlling shares had an assessed fair value of $475,000. The balance sheets of Stark (including the effect of the acquisition) and Small on December 31, 2018 are shown below:

Post-Acquisition

Stark

Small

Ca s h

300,000

125,000

A/R

170,000

500,000

Inventory

330,000

120,000

Other Current As sets

240,000

50,000

Equipment

620,000

375,000

Accumulated Depreciation Equipment

(120,000)

(75,000)

Land

100,000

Buildings (net)

600,000

0

Goodwill

0

75,000

Investment in Small

625,000

0

Total Assets

2,765,000

1,270,000

Account Payable

(750,000)

(650,000)

LT Liabilities

(830,000)

(102,000)

Common Stock and APIC

(625,000)

(400,000)

Retained earnings, 12/31/18

(560,000)

(118,000)

Total Liabilities and SE

(2,765,000)

(1,270,000)

At the date of acquisition, the due diligence team determined the following fair values:

Small- FMV

Dec 31, 2018

459,000

A/R

1-year turnover

150,000

Inventory

1-year turnover

170,000

Unrecorded patent

10 years useful life

150,000

Land

Indefinite useful life

104,000

LT Liability

2 years to maturity

Stark uses the equity method to account for the Investment in Small on its books.

During 2019 the following transactions took place:

Stark's total sales were $600,000. All sales from Stark were made to Small. Stark's sales had a 100% markup on the cost of goods sold. At the end of 2019, Small held inventory balance of $300,000 from the items purchased from Stark.

Stark sold equipment to Small on January 1, 2019 for $100,000 in cash. This equipment had a net book value of $90,000 ($180,000 original costs and $90,000 accumulated depreciation) and a useful life of 10 years at the time of the sale.

Small reported net income of $375,000 and paid dividends of $50,000. Stark reported net income of $133,500 (including Equity in Small's income) and paid dividends of $50,000.

During 2020 the following transactions took place:

All sales from Stark were made to Small. Stark's sales had a 100% markup on the cost of goods sold. The entire inventory from 2019 was sold during the year. At the end of 2020, Small's entire ending balance of inventory consisted of items purchased from Stark. As a result of these sales, there was a balance of $100,000 in intercompany accounts receivable and payable.

Small sold land to Stark for $125,000. This land had a book value of 100,000. The financial statements of Stark and Small for 2020 were as follows:

Income Statement

Stark

2020

Small

2020

Sales

750,000

1,225,000

COGS

(375,000)

(700,000)

Operating Expenses (Including Depreciation)

(421,000)

(160,000)

Gain on Sale of Land

25,000

Equity in Small's Income

167,950

0

Net Income

121,950

390,000

Balance Sheet

Cash

2020

Stark

980,000

2020

Small

1,120,000

A/R

270,000

500,000

Inventory

30,000

350,000

Other Current Assets

240,000

50,000

Equipment

440,000

475,000

Accumulated Depreciation Equipment

(112,000)

(155,000)

Land

125,000

Bui l dings (net)

540,000

Goodwill (Sub)

0

75,000

Investment in Small

782,450

Total Assets

3,295,450

2,415,000

Account Payable

(1,125,000)

(1,130,000)

LT Liabilities

(830,000)

(102,000)

Common Stock and APIC

(625,000)

(400,000)

Retained earnings, 12/31/20

(715,450)

(783,000)

Total Liabilities and equity

(3,295,450)

(2,415,000)

Required:

1.Determine the Goodwill assigned to Non-controlling interest at the acquisition date (2 points).

2.Determine the schedule of amortization of ECOBV for the years 2019 and 2020 (2 points).

3.What is the balance of "Investment in Small" at December 31, 2019? Use the T-account to present the calculations (3 points).

4.What is the balance of "Equity in Small's income" in 2019? Use the T-account to present the calculations (2 points).

5.Calculate the balance of NCI at December 31, 2020. Provide detail calculations of the three components of this balance (3 points).

6.Prepare consolidation adjustment entries (12 points).

7.Complete a consolidated worksheet for Stark Company and its subsidiary Small Company as of December 31, 2020. Use the format provided on the next page (6 points).

Accounts

Stark

Small

Consolidation Entries

NCI

Consolidated

Totals

Debit

Credit

Sales

(750,000)

(1,225,000)

Cost of Goods Sold

375,000

700,000

Operating Expenses (Incl. Depreciation)

421,000

160,000

Gain on Sale of Land

(25,000)

Equity in Small's Income

(167,950)

0

Separate company net income

(121,950)

(390,000)

Consolidated Net Income

NCI in Small Income

Net Income to Controlling Interest

Retained Earnings 1/1/20

Stark Company

(643,500)

SmallCompany

(443,000)

Net Income (above)

(121,950)

(390,000)

Dividend paid

Retained Earnings 12/31

50,000

50,000

(715,450)

(783,000)

Cash

980,000

1,120,000

A/R

270,000

500,000

Inventory

30,000

350,000

Unrecorded Patent

0

0

Other Current Assets

240,000

50,000

Equipment

440,000

475,000

Accumulated Depreciation Equipment

(112,000)

(155,000)

Land

125,000

0

Buildings (net)

540,000

0

Goodwill (Sub)

0

75,000

Investment in Small

782,450

0

Goodwill

Total Assets

3,295,450

2,415,000

Account Payable

(1,125,000)

(1,130,000)

LT Liabilities

(830,000)

(102,000)

Common Stock and APIC

(625,000)

(400,000)

NCI in Small 1/1/2020

NCI in Small 12/31/2020

Retained Earnings 12/31/2020

Total Liabilities and Equity

(715,450)

(783,000)

(3,295,450)

(2,415,000)