Question
On January 1, 2020, John Doe Enterprises (JDE) acquired a 55% interest in Bubba Manufacturing, Inc. (BMI). JDE paid for the transaction with $3 million
On January 1, 2020, John Doe Enterprises (JDE) acquired a 55% interest in Bubba Manufacturing, Inc. (BMI). JDE paid for the transaction with $3 million cash and 500,000 shares of JDE common stock (par value $1.00 per share). At the time of the acquisition, BMI's book value was $16,970,000.
On January 1, JDE stock had a market value of $14.90 per share and there was no control premium in this transaction. Any consideration transferred over book value is assigned to goodwill. BMI had the following balances on January 1, 2020.
| Book | Fair |
| Value | Value |
Land | $1,700,000 | $2,550,000 |
Buildings (seven-year remaining life) | 2,700,000 | 3,400,000 |
Equipment (five-year remaining life) | 3,700,000 | 3,300,000 |
For internal reporting purposes, JDE employed the equity method to account for this investment.
1. Prepare a schedule to determine goodwill, and the amortization and allocation amounts.
Answer:
The following account balances are for the year ending December 31, 2020 for both companies.
| John Doe | Bubba |
| Enterprises | Manufacturing |
Revenues | $(298,000,000) | $(103,750,000) |
Expenses | 271,000,000 | 95,800,000 |
Equity in income of Bubba Manufacturing | ( 4,361,500) | 0 |
Net income | $( 31,361,500) | $( 7,950,000) |
|
|
|
Retained earnings, January 1, 2020 | $( 2,500,000) | $( 100,000) |
Net income (above) | ( 31,361,500) | ( 7,950,000) |
Dividends paid | 5,000,000 | 3,000,000 |
Retained earnings, December 31, 2020 | $( 28,861,500) | $( 5,050,000) |
|
|
|
Current Assets | $ 30,500,000 | $ 20,800,000 |
Investment in Bubba Manufacturing | 13,161,500 |
|
Land | 1,500,000 | 1,700,000 |
Buildings | 5,600,000 | 2,360,000 |
Equipment (net) | 3,100,000 | 2,960,000 |
Total assets | $ 53,861,500 | $ 27,820,000 |
|
|
|
Accounts payable | $( 3,100,000) | $ (4,900,000) |
Notes payable |
| ( 1,000,000) |
Common stock | ( 2,900,000) | ( 6,000,000) |
Additional paid-in capital | ( 19,000,000) | ( 10,870,000) |
Retained earnings, Dec. 31, 2020 (above) | ( 28,861,500) | ( 5,050,000) |
Total liabilities and stockholders equity | $ (53,861,500) | $( 27,820,000) |
2. Prepare a consolidation worksheet for this business combination. Assume goodwill has been reviewed and there is no goodwill impairment.
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