Question
Patrick Corporation acquired 100 percent of OBrien Companys outstanding common stock on January 1, for $796,500 in cash. OBrien reported net assets with a carrying
Patrick Corporation acquired 100 percent of OBrien Companys outstanding common stock on January 1, for $796,500 in cash. OBrien reported net assets with a carrying amount of $448,000 at that time. Some of OBriens assets either were unrecorded (having been internally developed) or had fair values that differed from book values as follows:
| Book Values | Fair Values | |||
| Trademarks (indefinite life) | $ | 102,000 | $ | 299,000 |
| Customer relationships (5-year remaining life) | 0 | 96,600 | ||
| Equipment (10-year remaining life) | 359,000 | 329,000 | ||
Any goodwill is considered to have an indefinite life with no impairment charges during the year.
Following are financial statements at the end of the first year for these two companies prepared from their separately maintained accounting systems. OBrien declared and paid dividends in the same period. Credit balances are indicated by parentheses.
| Patrick | O'Brien | ||||||
| Revenues | $ | (1,815,000 | ) | $ | (856,000 | ) | |
| Cost of goods sold | 484,000 | 396,000 | |||||
| Depreciation expense | 104,100 | 95,400 | |||||
| Amortization expense | 28,200 | 0 | |||||
| Income from O'Brien | (348,280 | ) | 0 | ||||
| Net income | $ | (1,546,980 | ) | $ | (364,600 | ) | |
| Retained earnings 1/1 | $ | (764,000 | ) | $ | (312,000 | ) | |
| Net income | (1,546,980 | ) | (364,600 | ) | |||
| Dividends declared | 154,000 | 92,000 | |||||
| Retained earnings 12/31 | $ | (2,156,980 | ) | $ | (584,600 | ) | |
| Cash | $ | 238,000 | $ | 121,000 | |||
| Receivables | 322,000 | 68,400 | |||||
| Inventory | 202,000 | 168,000 | |||||
| Investment in O'Brien | 1,016,780 | 0 | |||||
| Trademarks | 518,000 | 79,800 | |||||
| Customer relationships | 0 | 0 | |||||
| Equipment (net) | 944,000 | 276,000 | |||||
| Goodwill | 0 | 0 | |||||
| Total assets | $ | 3,240,780 | $ | 713,200 | |||
| Liabilities | $ | (683,800 | ) | $ | (28,600 | ) | |
| Common stock | (400,000 | ) | (100,000 | ) | |||
| Retained earnings 12/31 | (2,156,980 | ) | (584,600 | ) | |||
| Total liabilities and equity | $ | (3,240,780 | ) | $ | (713,200 | ) | |
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Which investment method did Patrick use to compute the $348,280 income from O'Brien?
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Determine the totals to be reported for this business combination for the year ending December 31.
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Verify the totals determined in part (b) by producing a consolidation worksheet for Patrick and OBrien for the year ending December 31.
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