On 1/1/Y1, Hazel paid $2,400,000 cash to acquire 80% of voting common stock while Henry’s book value was $1,850,000 and fair market value (FMV) was $3,000,000. Henry has neither issued nor reacquired any of its own treasury stock since 1/1/Y1. All of Henry’s book value of assets and liabilities were the same as the FMV on 1/1/Y1, except for the patent account, which was undervalued by $700,000 with a five-year remaining life. Separate financial statements for these two companies as of 12/31/Y3 are:

Hazel Henry

Revenues $(3,480,000) $(1,900,000)

Cost of goods sold 1,640,000 1,000,000

Depreciation expense 208,000 170,000

Amortization expense 440,000 240,000

Interest expense 40,000 30,000

Equity in earnings of Henry (248,000) –0–

Net income $(1,400,000) $(460,000)

Retained earnings, 1/1/Y3 $(5,600,000) $(690,000)

Net income (1,400,000) (460,000)

Dividends declared 400,000 50,000

Retained earnings, 12/31/Y3 $(6,600,000) $(1,100,000)

Cash $1,070,000 $230,000

Accounts receivable 1,150,000 430,000

Inventory 1,980,000 1,600,000

Investment in Henry 2,840,000 –0–

Buildings and equipment 2,050,000 1,726,000

Patents 1,900,000 214,000

Total assets $10,990,000 $4,200,000

Accounts payable $(900,000) $(400,000)

Notes payable (1,090,000) (900,000)

Common stock (1,800,000) (1,600,000)

Additional paid-in capital (600,000) (200,000)

Retained earnings, 12/31/Y3 (6,600,000) (1,100,000)

Total liabilities and stockholders’ equity $(10,990,000) $(4,200,000)

Henry regularly sells inventory to Hazel as records show below:

Year Intra-Entity Sales Ending Inventory at Transfer Price

Y1 $250,000 $160,000

Y2 440,000 250,000

Y3 600,000 320,000

The gross profit percentage for the intra-entity transfers is set as 25%, 28%, and 25% for the three years.

No goodwill impairments from this acquisition have occurred. Hazel loaned $35,000 to Henry for a three-year term on 1/1/Y3.

Calculate

a. goodwill allocation between HAZEL and NCI,

b. ending investment balances of HAZEL’s investment in HENRY and NCI’s investment in HENRY,

c. the amount of annual excess amortization and the ending net amount for equipment,

d. the allocation of HENRY’s net income to HAZEL and NCI,

e. the allocation of dividends declared by HENRY to HAZEL and NCI