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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, 2015, for $660 million in cash and stock, plus an earnings contingency payable at the end of the third year with a fair value of $12 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 $240 million, as follows (in millions):

Common stock, par $ 24
Additional paid-in capital 360
Retained earnings (deficit) (150)
Accumulated other comprehensive income 18
Treasury stock (12)
Total $240

At the acquisition date, GOC's inventories were undervalued by $30 million, its property, plant and equipment was overvalued by $360 million, its reported patents and trademarks were undervalued by $60 million, and its long-term debt was undervalued by $18 million. GOC also had previously unreported identifiable intangibles: $30 million of advanced technology and $150 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 $12 million in fiscal 2017 and $24 million in fiscal 2018. Goodwill impairment losses were $12 million in fiscal 2016, $18 million in fiscal 2017, and $12 million in fiscal 2018.

GOC reported net income of $90 million in fiscal 2016, and a net loss of $12 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 $ 1,392 $ 72
Property, plant and equipment, net 3,600 840
Identifiable intangible assets 6,600 180
Investment in GOC 762 --
Current liabilities (1,050) (60)
Long-term liabilities (6,750) (630)
Common stock, par (132) (24)
Additional paid-in capital (3,480) (360)
Retained earnings, July 1 (708) 72
Accumulated other comprehensive income, July 1 (96) (24)
Treasury stock 48 12
Sales revenue (12,000) (5,400)
Equity in net income of GOC (42) --
Equity in OCI of GOC (6) --
Cost of goods sold 8,400 4,800
Operating expenses 3,480 528
Other comprehensive income (18) (6)
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) $ 90 $ (12) 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 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 for fiscal 2016 Answer
Equity in net income for fiscal 2017 Answer
Equity in net income 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.

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 $ 1,392 $ 72 (R) Answer Answer
Property, plant and equipment, net 3,600 840 (O-1) Answer Answer (R) Answer
Identifiable intangible assets 6,600 180 (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 762 0 Answer (C) Answer
Answer (E) --
Answer (R) --
Goodwill 0 0 (R) Answer Answer (O-6) Answer
Current liabilities (1,050) (60) Answer
Long-term liabilities (6,750) (630) (O-3) Answer Answer (R) Answer
Common stock (132) (24) (E) Answer Answer
Additional paid-in capital (3,480) (360) (E) Answer Answer
Retained earnings, July 1 (708) 72 Answer (E) Answer
Accumulated other comprehensive income, July 1 (96) (24) (E) Answer Answer
Treasury stock 48 12 Answer (E) Answer
Sales revenue (12,000) (5,400) Answer
Equity in net income of GOC (42) 0 (C) Answer Answer
Equity in OCI of GOC (6) 0 (C) Answer Answer
Cost of goods sold 8,400 4,800 Answer
Goodwill impairment loss -- 0 (O-6) Answer Answer
Other operating expenses 3,480 528 (O-2) Answer Answer (O-1) Answer
(O-4) Answer Answer (O-3) --
(O-5) Answer --
Other comprehensive income (18) (6) 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 statement of comprehensive 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

Please help and show all work. Thanks!

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