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 $550 million in cash and stock, plus an earnings contingency payable at the end of the third year with a fair value of $10 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 $200 million, as follows (in millions):

Common stock, par	$ 20
Additional paid-in capital	300
Retained earnings (deficit)	(125)
Accumulated other comprehensive income	15
Treasury stock	(10)
Total	$200

At the acquisition date, GOC's inventories were undervalued by $25 million, its property, plant and equipment was overvalued by $300 million, its reported patents and trademarks were undervalued by $50 million, and its long-term debt was undervalued by $15 million. GOC also had previously unreported identifiable intangibles: $25 million of advanced technology and $125 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 $10 million in fiscal 2017 and $20 million in fiscal 2018. Goodwill impairment losses were $10 million in fiscal 2016, $15 million in fiscal 2017, and $10 million in fiscal 2018.

GOC reported net income of $75 million in fiscal 2016, and a net loss of $10 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	$ 1,160	$ 60
Property, plant and equipment, net	3,000	700
Identifiable intangible assets	5,500	150
Investment in GOC	635	--
Current liabilities	(875)	(50)
Long-term liabilities	(5,625)	(525)
Common stock, par	(110)	(20)
Additional paid-in capital	(2,900)	(300)
Retained earnings, July 1	(590)	60
Accumulated other comprehensive income, July 1	(80)	(20)
Treasury stock	40	10
Sales revenue	(10,000)	(4,500)
Equity in net income of GOC	(35)	--
Equity in OCI of GOC	(5)	--
Cost of goods sold	7,000	4,000
Operating expenses	2,900	440
Other comprehensive income	(15)	(5)
Totals	$ 0	$ 0

Question

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	$ 1,160	$ 60	(R)	Answer			Answer
Property, plant and equipment, net	3,000	700	(O-1)	Answer	Answer	(R)	Answer
Identifiable intangible assets	5,500	150	(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	635	0			Answer	(C)	Answer
					Answer	(E)	--
					Answer	(R)	--
Goodwill	0	0	(R)	Answer	Answer	(O-6)	Answer
Current liabilities	(875)	(50)					Answer
Long-term liabilities	(5,625)	(525)	(O-3)	Answer	Answer	(R)	Answer
Common stock	(110)	(20)	(E)	Answer			Answer
Additional paid-in capital	(2,900)	(300)	(E)	Answer			Answer
Retained earnings, July 1	(590)	60			Answer	(E)	Answer
Accumulated other comprehensive income, July 1	(80)	(20)	(E)	Answer			Answer
Treasury stock	40	10			Answer	(E)	Answer
Sales revenue	(10,000)	(4,500)					Answer
Equity in net income of GOC	(35)	0	(C)	Answer			Answer
Equity in OCI of GOC	(5)	0	(C)	Answer			Answer
Cost of goods sold	7,000	4,000					Answer
Goodwill impairment loss	--	0	(O-6)	Answer			Answer
Other operating expenses	2,900	440	(O-2)	Answer	Answer	(O-1)	Answer
			(O-4)	Answer	Answer	(O-3)	--
			(O-5)	Answer			--
Other comprehensive income	(15)	(5)					Answer
	$ 0	$ 0		Answer	Answer		Answer