Given P06-45: F Herman Corporation common stock purchased by Fred, Inc. Cash paid for stock purchase Book value of Herman's assets and liabilities Fair value of noncontrolling interest Herman patents (12-year remaining life) were undervalued by Herman customer list acquisition-date fair value Life of customer list in years 60% $ 312,000 $ 300,000 $ 208,000 90,000 130,000 $ 10 Intra-entity inventory transfers: Original Transfer Ending Balance at Cost to Price Year Herman to Fred Transfer Price 2016 $ 80,000 $ 100,000 100,000 $ 125,000 120,000 20,000 2017 40,000 30,000 2018 90,000 2018 inventory transfers not paid for by Fred at year end Book value of land sold by Fred to Herman Sale price of land sold by Fred to Herman Face value of Fred's bonds purchased by Herman Cash interest rate of bonds purchased by Herman Fred's book value of bond liability at repurchase date Effective yield of bonds Herman's bond acquisition price based on effective rate of 10% Herman's reported accounts for 2018: Net income 50% 15,000 22,000 20,000 $ 8% $ 21,386 6% $ 18,732 $ 25,000 $ 300,000 $ Beginning retained earnings Dividends 4,000 Common stock $ 100,000 FRED, INC. AND HERMAN CORPORATION 6 Allocation of Acquisition-date Excess Fair Value 8 Consideration transferred 10 Noncontrolling interest fair value Acquisition-date fair value Book value acquired Fair value in excess of book value 11 12 13 14 Annual 15 Life Excess 16 Excess cost allocated to patents (years) Amortizations 17 based on fair value: Customer list 18 19 Total 20 21 22 a. Consolidation entries 23 24 Investment in Herman 25 Land 26 (To eliminate intra-entity gain created by previous intra-entity transfer) 27 28 Retained earnings, 1/1/18 Cost of goods sold 29 30 31 (To remove intra-entity inventory gross profit from prior year so it can be properly recognized in current year) 32 33 Common stock (Herman) Retained earnings, 1/1/18 (Herman) Investment in Herman 34 35 36 Common stock (Herman) Retained earnings, 1/1/18 (Herman) Investment in Herman Noncontrolling interest in Herman (To eliminate Herman's stockholders' equity accounts and to record beginning of year balance for noncontrolling interest) Patents Customer list Investment in Herman Noncontrolling interest (To recognize unamortized balances as of 1/1/18 of amounts allocated within original acquisition price) Equity income of Herman Investment in Herman (To eliminate intra-entity equity income accrual) Investment in Herman Dividends declared (To eliminate intra-entity dividend declaration) Amortization expense Patents Customer list (To recognize current year amortization expense) Accounts payable Accounts receivable (To remove intra-entity debt created by inventory transfers) Accounts payable Accounts receivable (To remove intra-entity debt created by inventory transfors) Bonds payable Premium on bonds payable Interest income Investment in parent bonds Interest expense Gain on retirement of bond (To eliminate effect created by bond acquisition and recognize the related retirement gain) Sales Cost of goods sold (or purchases) (To eliminate intra-entity transfers made during current year) Cost of goods sold Inventory (To defer intra-entity profits in ending inventory b.Calculations Herman's reported income for 2018 Excess fair value amortization 2017 intra-entity gross profit recognized in 2018 2018 deferred intra-entity gross profit Herman's realized net income for 2018 Noncontrolling interest ownership Net income attributable to noncontrolling interest Herman's reported income for 2018 Excess fair value amortization 2017 intra-entity gross profit recognized in 2018 2018 deferred intra-entity gross profit Herman's realized net income for 2018 Noncontrolling interest ownership Net income attributable to noncontrolling interest Noncontrolling interest, 1/1/18 Noncontrolling interest's share of Herman's net income Noncontrolling interest's share of Herman's dividends Noncontrolling interest, 12/31/18 c. Consolidation worksheet adjustments-intra-entity bonds Original gain on retirement Interest income recorded on investment in 2018 Interest expense recorded on liability in 2018 Required increase as of January 1, 2019 Bonds payable Premium on bonds payable Interest income Investment in Herman Investment in Fred's bonds Interest expense (To remove accounts pertaining to intra-entity bonds. "Investment in Herman" is adjusted here rather than retained earnings because equity method is used and the gain is attributed to the parent)