Question
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,
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, 2021, 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, 2021, 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 2023 and $4 million in fiscal 2024. Goodwill impairment losses were $2 million in fiscal 2022, $3 million in fiscal 2023, and $2 million in fiscal 2024.
GOC reported net income of $15 million in fiscal 2022, and a net loss of $2 million in fiscal 2023. 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, 2024, 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, 2024, investment in GOC balance and 2024 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.
2022 | 2023 | 2024 | |
---|---|---|---|
GOC's reported net income (loss) | $ 15 | $ (2) | Answer |
Revaluation write-offs: | |||
Property, plant and equipment | Answer | Answer | Answer |
Patents and trademarks | Answer | Answer | Answer |
Long-term debt | Answer | Answer | Answer |
Advanced technology | Answer | Answer | Answer |
Customer lists impairment loss | Answer | Answer | Answer |
Goodwill impairment loss | Answer | Answer | Answer |
Equity in net income (loss)of GOC | Answer | Answer | Answer |
Calculation of Investment balance, June 30, 2024: | |
Investment balance, June 30, 2021 (adjusted to remove earnings contingency) | Answer |
Equity in net income (loss)for fiscal 2022 | Answer |
Equity in net income (loss)for fiscal 2023 | Answer |
Equity in net income (loss)for fiscal 2024 | Answer |
Equity in OCI for fiscal 2022 and 2023 | Answer |
Equity in OCI for fiscal 2024 | Answer |
Investment balance, June 30, 2024 | Answer |
b. Use a working paper to consolidate the trial balances of ITI and GOC at June 30, 2024.
Use negative signs with your credit balance answers in the Dr (Cr) columns.
Consolidation Working Paper, June 30, 2024 (in millions) | |||||||
---|---|---|---|---|---|---|---|
Trial Balances Taken From Books | Eliminations | ||||||
IT Dr (Cr) | GOC Dr (Cr) | Debit | Credit | Consolidated Balances Dr (Cr) | |||
Current assets | $ 232 | $ 12 | (R) | Answer | Answer | ||
Property, plant and equipment, net | 600 | 140 | (O-1) | Answer | Answer | (R) | Answer |
Identifiable intangible assets | 1,100 | 30 | (R) | Answer | Answer | (O-2) | Answer |
Advanced technology | (R) | Answer | Answer | (O-4) | Answer | ||
Customer lists | (R) | Answer | Answer | (O-5) | Answer | ||
Investment in GOC | 127 | -- | Answer | (C) | Answer | ||
Answer | (E) | ||||||
Answer | (R) | ||||||
Goodwill | -- | -- | (R) | Answer | Answer | (O-6) | Answer |
Current liabilities | (175) | (10) | Answer | ||||
Long-term liabilities | (1,125) | (105) | (O-3) | Answer | Answer | (R) | Answer |
Common stock | (22) | (4) | (E) | Answer | Answer | ||
Additional paid-in capital | (580) | (60) | (E) | Answer | Answer | ||
Retained earnings, July 1 | (118) | 12 | Answer | (E) | Answer | ||
Accumulated other comprehensive income, July 1 | (16) | (4) | (E) | Answer | Answer | ||
Treasury stock | 8 | 2 | Answer | (E) | Answer | ||
Sales revenue | (2,000) | (900) | Answer | ||||
Equity in net income of GOC | (7) | -- | (C) | Answer | Answer | ||
Equity in OCI of GOC | (1) | -- | (C) | Answer | Answer | ||
Cost of goods sold | 1,400 | 800 | Answer | ||||
Goodwill impairment loss | -- | -- | (O-6) | Answer | Answer | ||
Other operating expenses | 580 | 88 | (O-2) | Answer | Answer | (O-1) | Answer |
(O-4) | Answer | Answer | (O-3) | ||||
(O-5) | Answer | ||||||
Other comprehensive income | (3) | (1) | Answer | ||||
$ 0 | $ 0 | Answer | Answer | Answer |
c. Present the consolidated balance sheet at June 30, 2024, and the consolidated statement of comprehensive income for 2024. Do not use negative signswith your statement of comprehensive income answers.
Consolidated Statement of Comprehensive Income for Fiscal 2024 | ||
---|---|---|
Sales revenue | Answer | |
Costs of goods sold | Answer | |
Gross margin | Answer | |
Operating expenses: | ||
Goodwill impairment loss | Answer | |
Other operating expenses | Answer | Answer |
Net income | Answer | |
Other comprehensive income | Answer | |
Comprehensive income | Answer |
Hint(s): Combine all identifiable intangible assets on the balance sheet.
Use a negative signwith your treasury stock answer.
Consolidated Balance Sheet, June 30, 2024 | |
---|---|
Assets | |
Current assets | Answer |
Property, plant and equipment, net | Answer |
Identifiable intangible assets | Answer |
Goodwill | Answer |
Total assets | Answer |
Liabilities and stockholders' equity | |
Current liabilities | Answer |
Long-term liabilities | Answer |
Common stock | Answer |
Additional paid-in capital | Answer |
Retained earnings | Answer |
Accumulated other comprehensive income | Answer |
Treasury stock | Answer |
Total liabilities and stockholders' equity | Answer |
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