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, 2015, for $330 million in cash and stock, plus an earnings contingency payable at the end of the third year with a fair value of $6 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, 2015, GOC's total stockholders' equity was $120 million, as follows (in millions):

Common stock, par	$ 12
Additional paid-in capital	180
Retained earnings (deficit)	(75)
Accumulated other comprehensive income	9
Treasury stock	(6)
Total	$120

At the acquisition date, GOC's inventories were undervalued by $15 million, its property, plant and equipment was overvalued by $180 million, its reported patents and trademarks were undervalued by $30 million, and its long-term debt was undervalued by $9 million. GOC also had previously unreported identifiable intangibles: $15 million of advanced technology and $75 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 $6 million in fiscal 2017 and $12 million in fiscal 2018. Goodwill impairment losses were $6 million in fiscal 2016, $9 million in fiscal 2017, and $6 million in fiscal 2018.

GOC reported net income of $45 million in fiscal 2016, and a net loss of $6 million in fiscal 2017. 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, 2018, are as follows:

	Dr (Cr)
(in millions)	IT	GOC
Current assets	$ 696	$ 36
Property, plant and equipment, net	1,800	420
Identifiable intangible assets	3,300	90
Investment in GOC	381	--
Current liabilities	(525)	(30)
Long-term liabilities	(3,375)	(315)
Common stock, par	(66)	(12)
Additional paid-in capital	(1,740)	(180)
Retained earnings, July 1	(354)	36
Accumulated other comprehensive income, July 1	(48)	(12)
Treasury stock	24	6
Sales revenue	(6,000)	(2,700)
Equity in net income of GOC	(21)	--
Equity in OCI of GOC	(3)	--
Cost of goods sold	4,200	2,400
Operating expenses	1,740	264
Other comprehensive income	(9)	(3)
Totals	$ 0	$ 0

a. Prepare a schedule that computes the June 30, 2018, investment in GOC balance and 2018 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.

	2016	2017	2018
GOC's reported net income (loss)	$ 45	$ (6)	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, 2018:
Investment balance, June 30, 2015 (adjusted to remove earnings contingency)	Answer
Equity in net income (loss)for fiscal 2016	Answer
Equity in net income (loss)for fiscal 2017	Answer
Equity in net income (loss)for fiscal 2018	Answer
Equity in OCI for fiscal 2016 and 2017	Answer
Equity in OCI for fiscal 2018	Answer
Investment balance, June 30, 2018	Answer

b. Use a working paper to consolidate the trial balances of ITI and GOC at June 30, 2018.

Remember to use negative signs with your credit balance answers in the Dr (Cr) columns.

Consolidation Working Paper, June 30, 2018 (in millions)
	Trial Balances Taken From Books		Eliminations
	IT Dr (Cr)	GOC Dr (Cr)		Debit	Credit		Consolidated Balances Dr (Cr)
Current assets	$ 696	$ 36	(R)	Answer			Answer
Property, plant and equipment, net	1,800	420	(O-1)	Answer	Answer	(R)	Answer
Identifiable intangible assets	3,300	90	(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	381	0			Answer	(C)	Answer
					Answer	(E)	--
					Answer	(R)	--
Goodwill	0	0	(R)	Answer	Answer	(O-6)	Answer
Current liabilities	(525)	(30)					Answer
Long-term liabilities	(3,375)	(315)	(O-3)	Answer	Answer	(R)	Answer
Common stock	(66)	(12)	(E)	Answer			Answer
Additional paid-in capital	(1,740)	(180)	(E)	Answer			Answer
Retained earnings, July 1	(354)	36			Answer	(E)	Answer
Accumulated other comprehensive income, July 1	(48)	(12)	(E)	Answer			Answer
Treasury stock	24	6			Answer	(E)	Answer
Sales revenue	(6,000)	(2,700)					Answer
Equity in net income of GOC	(21)	0	(C)	Answer			Answer
Equity in OCI of GOC	(3)	0	(C)	Answer			Answer
Cost of goods sold	4,200	2,400					Answer
Goodwill impairment loss	--	0	(O-6)	Answer			Answer
Other operating expenses	1,740	264	(O-2)	Answer	Answer	(O-1)	Answer
			(O-4)	Answer	Answer	(O-3)	--
			(O-5)	Answer			--
Other comprehensive income	(9)	(3)					Answer
	$ 0	$ 0		Answer	Answer		Answer

c. Use a working paper to consolidate the trial balances of ITI and GOC at June 30, 2018. Present the consolidated balance sheet at June 30, 2018, and the consolidated statement of comprehensive income for 2018.

Do not use negative signs with your consolidated statement of income answers.

Consolidated Statement of Comprehensive Income for Fiscal 2018
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 sign with your treasury stock answer.

Consolidated Balance Sheet, June 30, 2018
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