Problem 3

(50 points)

For a $10.5 million cash and stock payment, Preston Company acquired a 55% controlling equity interest in the common voting stock of Scalibrini, Inc. The acquisition was completed on 1/1/20x0. At the time of the acquisition, the book value of Scalibrinis net assets was $16,970,000.

Preston acquired Scalibrini with a cash payment of $3 million and by issuing 500,000 shares of their own $1 par value common stock, which at the acquisition date had a market value of $14.90/share.

There was no control premium in this transaction. Any amount of the acquisition price paid in excess of the net book value of the acquired assets is assigned to goodwill.

At 1/1/20x0, Scalibrini, Inc. prepared the following analysis of the book value vs. the fair value of their non-current assets:

	Book	Fair	Remaining
	Value	Value	Useful Life
Land	$1,700,000	$2,550,000	-
Buildings	2,700,000	3,400,000	7 years
Equipment	3,700,000	3,300,000	5 years

Preston Company uses the equity method to account for the acquisition of Scalibrini, Inc.

Required:

1. Prepare a schedule showing the allocation of the purchase price to the net asset acquired. In your schedule include the estimated useful lives and annual amortizations for fair value adjustments to specific net assets acquired.
2. Prepare the journal entry to record Preston Companys investment in Scalibrini, Inc. @1/1/20x0.
3. Prepare a schedule reconciling Preston Companys Investment in Scalibrini, Inc. account from the acquisition date, i.e., 1/1/20x0, to 12/31/20x0.
4. On the next page, Ive posted Preston Company and Scalibrini, Inc.s account balances as of December 31, 20x0. Using those account balances,
   1. Prepare the worksheet adjusting entries as of December 31, 20x0 to consolidate Preston Company and Scalibrini, Inc.
   2. Using the given information and an excel worksheet, prepare the worksheet to consolidate Preston Company and Scalibrini, Inc.
5. For information purposes, the Controller of Preston Company asks that you briefly summarize the implications for the consolidation accounting and the consolidating adjusting entries of an intra-entity, i.e. between Preston and Scalibrini, transfer of a depreciable asset.

Following are the separate financial statements of Preston and Scalibrini, Inc. for the year ending 12/31/20x0:

	Preston	Scalibrini
	Company	Incorporated
Revenues	298,000,000	103,750,000
Expenses	271,000,000	95,800,000
Equity in income of Scalibrini, Inc.	4,361,500	0
Net income	31,361,500	7,950,000
Retained earnings, January 1, 20x0	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, 20x0	28,861,500	5,050,000
Current Assets	30,500,000	20,800,000
Investment in Scalibrini, Inc.	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, 20x0 (above)	28,861,500	5,050,000
Total liabilities and stockholders equity	53,861,500	27,820,000