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Value Added Accounting Practices in Strategic Business Decisions Case 4 Fall 2016 Names Section: Points: Case 3.1 - 40 points Case 3.2 - 40 points Total (80 points) Case 4.1 Intercompany transactions Peninsula Company acquired all the outstanding stocks of Sandbar Corporation on January 1, 2011, for $15,000,000, when Sandbar's stockholder equity consisted of $5,000,000 capital stock and $2,000,000 retained earnings. The price reflected a $500,000 undervaluation of Sandbar's inventory (sold in 2011) and a $3,500,000 undervaluation of Sandbar's buildings (remaining useful life seven years). During 2012, Sandbar sold a piece of land that cost $1,000,000 to Peninsula for $1,500,000. Peninsula resold the land for $2,200,000 during 2015. Peninsula sells inventory to Sandbar on a regular basis, as follows (in thousands): 2011 2012 2013 2014 2015 Sales to Sandbar Cost to Peninsula 500 1,000 1,200 1,000 1,500 300 600 720 600 900 % unsold by Sandbar at year end 0 30 18 25 20 % unpaid by Sandbar at year end 0 50 30 20 20 Sandbar sold equipment with a book value of $800,000 to Peninsula on January 1, 2015, for $1,600,000. This equipment had a remaining useful life of four years at the time of the sale. Peninsula uses the equity method to account for its investment in Sandbar. The financial statements for Peninsula and Sandbar are summarized as follows (in thousands): Combined Income and Retained earnings Statement for the year ended December 31, 2015 Sales Gain on land Peninsula Sandbar 26,000 11,000 700 Gain on equipment 800 Income from Sandbar 1,380 Cost of Sales (15,000) (5,000) Depreciation expense (3,700) (2,000) Other Expenses (4,280) (2,800) 5,100 2,000 Net Income Add: Beginning R/E 12,250 4,000 Deduct: Dividends (3,000) (1,000) 14,350 5,000 R/E December 31 Balance Sheet at December 31, 2015 Peninsula Sandbar Cash 1,170 500 A/R, net 2,000 1,500 Inventories 5,000 2,000 Land 4,000 1,000 Building, net 15,000 4,000 Equipment, net 10,000 4,000 Investment in Sandbar 14,280 Total Assets 51,450 13,000 A/P 4,100 1,000 Other Liabilities 7,000 2,000 Capital Stocks 26,000 5,000 Retained earnings 14,350 5,000 51,450 13,000 Total equities Required: 1. Determine the schedule of amortization of ECOBV for the years 2011 to 2015 (2 points). 2. Reconstruct the balance for the account \"Investment in Sandbar\" at December 31, 2015. Use the T-account to present the calculations (5 points). 3. Reconstruct the balance of the account \"Income from Sandbar\" for the year 2015. Use the Taccount to present the calculations (3 points). 4. Prepare consolidation adjustment entries (12 points). 5. Complete a consolidated worksheet for Peninsular Company and its subsidiary Sandbar Company as of December 31, 2015. Use the format provided in the next page (You can write your own Excel worksheet, but with the indicated format) (18 points). Peninsula Sandbar (26,000) (11,000) Cost of Sales 15,000 5,000 Gain on land (700) 0 0 (800) Depreciation expense 3,700 2,000 Other Expenses 4,280 2,800 (1,380) 0 (5,100) (2,000) Accounts Sales Gain on equipment Equity in Sandbar's Income Net Income Retained Earnings 1/1/15 (12,250) Peninsula Company (4,000) Sandbar Company (5,100) (2,000) 3,000 1,000 (14,350) (5,000) Cash 1,170 500 A/R, net 2,000 1,500 Inventories 5,000 2,000 Land 4,000 1,000 Building, net 15,000 4,000 Equipment, net 10,000 4,000 Investment in Sandbar 14,280 0 51,450 13,000 A/P (4,100) (1,000) Other Liabilities (7,000) (2,000) Capital Stocks (26,000) (5,000) Retained Earnings 12/31/2015 (14,350) (5,000) (51,450) (13,000) Net Income (above) Dividend paid Retained Earnings 12/31 Total Assets Total Liabilities and Equities Consolidation Entries Debit Credit Consolidated Totals Case 4.2 Non-controlling Interests and Intercompany transactions Alpha effectively gained control over Beta by acquiring 55% of Beta's common shares issuing 500,000 shares with market value of $1.25 per share to Beta's shareholders on December 31, 2011. There was an assessment of $475,000 for the Beta's non-controlling shares. The balance sheets of Alpha (including the effect of the acquisition) and Beta on December 31, 2011 are shown below: Post-Acquisition Alpha Beta Cash 300,000 125,000 A/R 170,000 500,000 Inventory 330,000 120,000 Other Current Assets 240,000 50,000 Equipment 620,000 375,000 (120,000) (75,000) Accumulated Depreciation Equipment Land 100,000 Buildings (net) 600,000 0 0 75,000 625,000 0 2,765,000 1,270,000 Account Payable (750,000) (650,000) LT Liabilities (830,000) (102,000) Common Stock and APIC (625,000) (400,000) Retained earnings, 12/31/11 (560,000) (118,000) (2,765,000) (1,270,000) Goodwill Investment in Beta Total Assets Total Liabilities and equity At the date of acquisition, the due diligence team determined the following fair values: BETA -FV Dec 31 2011 459,000 A/R 1 year turnover 150,000 Inventory 1 year turnover 170,000 Unrecorded patent 10 year useful life 150,000 Land Indefinite useful life 104,000 LT Liability 2 years All fair value differences are amortized using straight line. Alpha uses equity method to account for Investment in Beta in its books. During 2012 the following transactions took place: Alpha total sales were $600,000. All sales from Alpha were made to Beta. Alpha's sales had a 100% markup on the cost of goods sold. At the end of 2012, Beta's held inventory balance of $300,000 from the items purchased from Alpha. Alpha sold equipment to Beta on January 1, 2012 for $100,000 in cash. This equipment had a net book value of $90,000 ($180,000 original costs and $90,000 accumulated depreciation) and a useful life of 10 years at the time of the sale. Beta reported net income for $375,000 and paid dividends of $50,000. Alpha reported net income of $133,500 (including Equity's in Beta's income) and paid dividends of $50,000. During 2013 the following transactions took place: All sales from Alpha were made to Beta. Alpha's sales had a 100% markup on the cost of goods sold. The entire inventory from 2012 was sold during the year. At the end of 2013, Beta's entire ending balance of inventory consisted of items purchased from Alpha. As a result of these sales, there was a balance of $100,000 in intercompany accounts receivable and payable. Beta sold land to Alpha for $125,000. This land had a book value of $100,000. The financial statements of Alpha and Beta for 2013 were as follows: Income Statement Alpha Beta 2013 2013 Sales 750,000 1,225,000 COGS (375,000) (700,000) Operating Expenses (Including Depreciation) (421,000) (160,000) Gain on Sale of Land 25,000 Equity in Beta's income 167,950 0 Net Income 121,950 390,000 Balance Sheet 2013 2013 Alpha Beta Cash 980,000 1,120,000 A/R 270,000 500,000 Inventory 30,000 350,000 Other Current Assets 240,000 50,000 Equipment 440,000 475,000 (112,000) (155,000) Accumulated Depreciation Equipment Land 125,000 Buildings (net) 540,000 Goodwill (Sub) 0 Investment in Beta 75,000 782,450 Total Assets 3,295,450 2,415,000 (1,125,000) (1,130,000) LT Liabilities (830,000) (102,000) Common Stock and APIC (625,000) (400,000) Retained earnings, 12/31/12 (715,450) (783,000) (3,295,450) (2,415,000) Account Payable Total Liabilities and equity Required: 1. Determine the Goodwill assigned to Non-controlling interest at the acquisition date (2 points). 2. Determine the schedule of amortization of ECOBV for the years 2012 and 2013 (2 points). 3. What is the balance of \"Investment in Beta\" at December 31, 2012? Use the T-account to present the calculations (3 points). 4. What is the balance of \"Equity in Beta's income\" in 2012? Use the T-account to present the calculations (2 points). 5. Calculate the balance of NCI at December 31, 2013. Provide detail calculations of the three components of this balance (3 points). 6. Prepare consolidation adjustment entries (12 points) 7. Complete a consolidated worksheet for Alpha Company and its subsidiary Beta Company as of December 31, 2013. Use the format provided in the next page (You can write your own Excel worksheet, but with the indicated format) (16 points). Accounts Alpha Sales Cost of Goods Sold Operating Expenses (Incl. Depreciation) Gain on Sale of Land Equity in Beta's Income Separate company net income Consolidated Net Income NCI in Beta Income Net Income to Controlling Interest Beta (750,000) 375,000 (1,225,000) 700,000 421,000 (167,950) 160,000 (25,000) 0 (121,950) (390,000) Retained Earnings 1/1/13 Alpha Company Beta Company Net Income (above) Dividend paid Retained Earnings 12/31 (121,950) 50,000 (715,450) (443,000) (390,000) 50,000 (783,000) Cash A/R Inventory Unrecorded Patent Other Current Assets Equipment Accumulated Depreciation Equipment Land Buildings (net) Goodwill (Sub) Investment in Beta 980,000 270,000 30,000 0 240,000 440,000 (112,000) 125,000 540,000 0 782,450 1,120,000 500,000 350,000 0 50,000 475,000 (155,000) 0 0 75,000 0 3,295,450 (1,125,000) (830,000) (625,000) 2,415,000 (1,130,000) (102,000) (400,000) (715,450) (3,295,450) (783,000) (2,415,000) (643,500) Goodwill Total Assets Account Payable LT Liabilities Common Stock and APIC NCI in Beta 1/1/2013 NCI in Beta 12/31/2013 Retained Earnings 12/31/2013 Total Liabilities and Equities Consolidation Entries Debit Credit NCI Consolidated Totals CASE 3.2 1.- NCI in : The subsidiary as of beginning of current year Beginning book value 5% of unamortized excess FV allocation as of 1/1 25,860 1,245 27,105 The subsidiary current year Net Income 5%of Beta's Net Income Post-Acquisition 5% of excess Fair Value amortization 5,000 (166) 4,834 The subsidiary's dividend payments 5% of dividends declared after acquisition (3,000) (3,000) 28,939 Balance Non-Controlling Interest as of 12/31/13 2.- Account Sales Debit (1,940,000) Cost of Goods Sold Consolidation Entries Beta Alpha 1,261,000 (976,000) (S) 584,000 Operating expenses 484,000 242,000 (E) Equity in Beta's Income (91,845) (I) Consolidated Net Income (286,845) Non-Controlling Interest in Beta Income (150,000) - Net Income to Controlling Interest Retained Earnings 1/1/2013 315,360 209,200 (S) Net Income (above) 286,845 150,000 Divident Paid (60,000) Retained Earnings 12/31/13 602,205 299,200 352,600 179,200 Balance Sheet Current Assets Property and Equipment 1,334,000 562,000 (A) (D) Investment in Beta 549,845 Total Assets Account and Notes Payable 2,236,445 741,200 270,240 124,000 Dividend Payable Common Stock ($10 Par) 60,000 1,000,000 364,000 Treasury Stock at Cost, 500 Shares Non-Controlling Interest in Beta 1/1/13 200,000 (S) 90,000 (S) (32,000) Non-Controlling Interest in Beta 12/31/13 Retained Earning 12/31/13 Total liabilities and equities 602,205 299,200 2,236,445 741,200 *CALCULATIONS FOR HIGHLIGHED CELL AND ENTRIES IN PAGE 2 Fair value of compensation transferred Fair value non-controlling interest FAIR VALUE BETA'S NET ASSETS BETA'S BOOK VALUE AS OF 5/1/2013 ECOBV 5% of ECOBV 515,000 27,105 542,105 517,200 (a) 24,905 1,245 (2) (a) IDENTIFIABLE ECOBV Equipment (5 year useful life) Annual Amortization 24,905 4,981 5% ### ENTRIES (S) Common Stock Other Contributed Capital Retained earnings 1/1/13 Sales pre-acquisition Cost of Goods Sold pre-acquisition Operating expenses pre-acquisition Treasury Stock Investment in Beta Non-Controlling Interest 200,000 90,000 209,200 325,333 194,667 80,667 32,000 491,340 25,860 (A) Equipment Investment in Say Non-Controlling Interest 24,905 (I) Equity in Beta's income Investment in Beta 91,845 (D) Investment in Beta Dividens 57,000 (E)Operating expenses Equipment 3,321 23,660 1,245 91,845 57,000 3,321 NCI - Beta 25,860 5,000 1,245 Consolidation Entries Debit Credits Noncontrolling Consolidated Totals Interest 325,333 3,321 (2,590,667) 194,667 (S) 1,650,333 80,667 (S) 648,654 91,845 0 (291,679) 4,834 4,834 (286,845) 209,200 315,360 286,845 57,000 (D) (3,000) 602,205 531,800 24,905 3,321 (E) 1,917,585 57,000 491,340 (S) (0) 23,660 (A) 91,845 (I) 2,449,384 394,240 60,000 200,000 1,000,000 90,000 364,000 32,000 (S) - 25,860 (S) 1,245 (A) 27,105 28,939 (b) BETA'S RETAINED EARNINGS 5/ Retained earnings 1/1/2013 Net income pre-acquisition ($150,000*4/12) 602,205 1,001,604 1,001,604 Beta (book value) Common Stock Other Contributed Capital Treasury Stock Retained earning 5/1/2013 2,449,384 200,000 90,000 (32,000) 259,200 (net income 12/31 150,000 *4/12 +beg retained earnings 209,000) 517,200 AMORTIZATION SCHEDULE 2013 3,321 166 3,155 20 2014 15 4,981 ### 249 ### 4,732 ### 2016 4,981 249 4,732 Values pre-acquisition (4 out of 12 months) Sales ### Cost of Goods Sold ### Operating expenses ### 2017 4,981 249 4,732 2018 1,660 83 1,577 BETA'S RETAINED EARNINGS 5/1/2013 Retained earnings 1/1/2013 Net income pre-acquisition ($150,000*4/12) earnings 209,000)