Consolidation Working Paper, Three years after acquisition
International Technology Inc. (ITI) acquired all of the voting stock of Global Outsourcing Corporation (GOC) on June 30, 2018, 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, 2018, GOCs total shareholders equity was $40 million, as follows (in millions):
Common stock, par			$4
Additional paid-in capital			60
Retained earnings (deficit)			-25
Accumulated other comprehensive income			3
Treasury stock			-2
Total			$40
At the acquisition date, GOCs 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, net		20 years
Patents and trademarks		5 years
Advanced technology		5 years
Customer lists		Indefinite
Long-term debt		3 years
The straight-line method is used for limited-life assets. Impairment losses on the customer lists were $2 million in fiscal 2020 and $4 million in fiscal 2021. Goodwill impairment losses were $2 million in fiscal 2019, $3 million in fiscal 2020, and $2 million in fiscal 2021.
GOC reported net income of $15 million in fiscal 2019, and a net loss of $2 million in fiscal 2020. 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, 2021, are as follows:
		Dr (Cr)
(in millions)		IT	GOC
Current assets		$232	$12
Property, plant and equipment, net		600	140
Identifiable intangible assets		1,100	30
Investment in GOC		127	--
Current liabilities		-175	-10
Long-term liabilities		-1,125	-105
Common stock, par		-22	-4
Additional paid-in capital		-580	-60
Retained earnings, July 1		-118	12
Accumulated other comprehensive income, July 1		-16	-4
Treasury stock		8	2
Sales revenue		-2,000	-900
Equity in net income of GOC		-7	--
Equity in OCI of GOC		-1	--
Cost of goods sold		1,400	800
Operating expenses		580	88
Other comprehensive income		-3	-1
Totals		$0	$0
a. Prepare a schedule that computes the June 30, 2021, investment in GOC balance and 2021 equity in net income on ITIs books.
Use negative signs with your answers that reduce equity in net income and the investment balance.
Use a negative sign for equity in net loss answers.
		2019	2020	2021
GOC's reported net income (loss)		$15	($2)	$ Answer
Revaluation write-offs:		?	?
Property, plant and equipment		?	?
Patents and trademarks		?	?
Long-term debt		?	?
Advanced technology		?	?
Customer lists impairment loss		?	?
Goodwill impairment loss		?	?
Equity in net income (loss) of GOC		?	?
Calculation of Investment balance, June 30, 2021:
Investment balance, June 30, 2018 (adjusted to remove earnings contingency)					?
Equity in net income (loss) for fiscal 2019					?
Equity in net income (loss) for fiscal 2020					?
Equity in net income (loss) for fiscal 2021					?
Equity in OCI for fiscal 2019 and 2020					?
Equity in OCI for fiscal 2021					?
Investment balance, June 30, 2021					?
b. Use a working paper to consolidate the trial balances of ITI and GOC at June 30, 2021.
Use negative signs with your credit balance answers in the Dr (Cr) columns.
Consolidation Working Paper, June 30, 2021 (in millions)
	Trial Balances Taken From Books		Eliminations
	IT	GOC		Debit	Credit		Consolidated Balances
	Dr (Cr)	Dr (Cr)					Dr (Cr)
Current assets	$232	$12	(R)	?	?		?
Property, plant and equipment, net	600	140	(O-1)	?	?	(R)	?
Identifiable intangible assets	1,100	30	(R)	?	?	(O-2)	?
Advanced technology			(R)	?	?	(O-4)	?
Customer lists			(R)	?	?	(O-5)	?
Investment in GOC	127	--		?	?	(C)	?
				?	?	(E)	?
				?	?	(R)	?
Goodwill	--	--	(R)	?	?	(O-6)	?
Current liabilities	-175	-10		?	?		?
Long-term liabilities	-1,125	-105	(O-3)	?	?	(R)	?
Common stock	-22	-4	(E)	?	?		?
Additional paid-in capital	-580	-60	(E)	?	?		?
Retained earnings, July 1	-118	12		?	?	(E)	?
Accumulated other comprehensive income, July 1	-16	-4	(E)	?	?		?
Treasury stock	8	2		?	?	(E)	?
Sales revenue	-2,000	-900		?	?		?
Equity in net income of GOC	-7	--	(C)	?	?		?
Equity in OCI of GOC	-1	--	(C)	?	?		?
Cost of goods sold	1,400	800		?	?		?
Goodwill impairment loss	--	--	(O-6)	?	?		?
Other operating expenses	580	88	(O-2)	?	?	(O-1)	?
			(O-4)	?	?	(O-3)	?
			(O-5)	?	?		?
Other comprehensive income	-3	-1		?	?		?
	$0	$0		?	?		?
c. Present the consolidated balance sheet at June 30, 2021, and the consolidated statement of comprehensive income for 2021.
Do not use negative signs with your statement of comprehensive income answers.
Consolidated Statement of
Comprehensive Income for Fiscal 2021
Sales revenue			?
Costs of goods sold			?
Gross margin			?
Operating expenses:			?
Goodwill impairment loss			?
Other operating expenses			?
Net income			?
Other comprehensive income			?
Comprehensive income			?
Hint(s): Combine all identifiable intangible assets on the balance sheet.
Do not use negative signs with any of your balance sheet answers.
Consolidated Balance Sheet, June 30, 2021
Assets			?
Current assets			?
Property, plant and equipment, net			?
Identifiable intangible assets			?
Goodwill			?
Total assets			?
Liabilities and stockholders' equity			?
Current liabilities			?
Long-term liabilities			?
Common stock			?
Additional paid-in capital			?
Retained earnings			?
Accumulated other comprehensive income			?
Treasury stock			?
Total liabilities and stockholders' equity			?