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With a cash payment of $15 million and by issuing 500,000 shares of their own $1 par value common stock, Preston Company acquired a 100%

With a cash payment of $15 million and by issuing 500,000 shares of their own $1 par value common stock, Preston Company acquired a 100% of the outstanding common stock of Scalibrini, Inc. At the acquisition date, 1/1/20x0, Preston Companys common stock had a market value of $8/share.

At the time of the acquisition, the book value of Scalibrinis net assets was $16,970,000. There was no control premium in this transaction. Any amount of the acquisition price paid in excess of the fair value of the net assets acquired 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. and, after the acquisition, Scalibrini, Inc. will be a separate operating subsidiary of Preston Company.

Required:

  1. Prepare the journal entry to record Preston Companys investment in Scalibrini, Inc. @1/1/20x0.
  2. Prepare a schedule showing the allocation of the purchase price to the net assets acquired. In your schedule include the estimated useful lives and annual amortizations for fair value adjustments to specific net assets acquired.
  3. Prepare a schedule showing the change in 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 Preston Companys fye 12/31/20x0 journal entries on their separate company books and records related to their investment in Scalibrini, Inc.
    2. Prepare the worksheet adjusting entries as of December 31, 20x0 necessary to consolidate Preston Company and Scalibrini, Inc.
    3. 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 transfer of a depreciable asset, i.e. between Preston and Scalibrini.

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.

8,000,000

0

Net income

35,000,000

7,950,000

Retained earnings, January 1, 20x0

2,300,000

100,000

Net income (above)

35,000,000

7,950,000

Dividends paid

4,800,000

3,000,000

Retained earnings, December 31, 20x0

32,500,000

5,050,000

Current Assets

24,850,500

20,800,000

Investment in Scalibrini, Inc.

22,450,000

Land

1,500,000

1,700,000

Buildings

5,600,000

2,360,000

Equipment (net)

3,100,000

2,960,000

Total assets

57,500,500

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)

32,500,000

5,050,000

Total liabilities and stockholders equity

57,500,000

27,820,000

F. With respect to accounting for goodwill reported in the acquisition of Scalibrini, Inc.:

  1. Explain the U.S. GAAP approach for accounting for the impairment of goodwill.
  2. Discuss the difference between U.S. GAAP and international accounting standards on the accounting for goodwill impairment.

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