Consolidation Eliminating Entries at End of First Year
Peak Entertainment acquires 60 percent of its subsidiary Saddlestone Inc. on January 1, 2016. In preparing to consolidate Peak and Saddlestone at December 31, 2016, we assemble the following information:
Value of stock given up to acquire Saddlestone: $10,000,000.
Direct merger costs: $250,000.
Saddlestone’s stockholders’ equity at acquisition: $7,200,000.
Fair value of earnings contingency agreement to be paid in cash: $300,000.
Fair value of previously unrecorded identifiable intangibles (5-year life): $2,000,000.
Goodwill and identifiable intangibles are not impaired in 2016.
Fair value of the 40 percent noncontrolling interest at acquisition: $6,500,000.
Saddlestone’s net income in 2016: $3,000,000.
Saddlestone’s dividends declared and paid in 2016: $1,000,000.
Peak uses the complete equity method to report the investment on its own books.
Required
(a) Calculate total goodwill and its allocation to the controlling and noncontrolling interests.
| Allocation of goodwill between controlling and noncontrolling interest: | |
|---|---|
| Total goodwill | $Answer |
| Peaks goodwill: | Answer |
| Goodwill to noncontrolling interest | $Answer |
(b) Calculate equity in net income for 2016, as reported on Peak’s books, and the noncontrolling interest in net income, as reported on the consolidated income statement for 2016.
| 2016 equity in net income and noncontrolling interest in net income: | |
|---|---|
| Total | $Answer |
| Equity in NI: | Answer |
| Noncontrolling interest in NI | $Answer |
(c) Prepare the consolidation eliminating entries made at December 31, 2016.
| Consolidation Journal | ||
|---|---|---|
| Description | Debit | Credit |
| (C) | ||
| AnswerIdentifiable intangiblesEquity in net income of SaddlestoneCashDividends – Saddlestone | Answer | Answer |
| AnswerEquity in net income of SDividends – SaddlestoneIdentifiable intangiblesCash | Answer | Answer |
| Investment in Saddlestone | Answer | Answer |
| (E) | ||
| AnswerIdentifiabl intangiblesStockholders’ equity-Saddlestone, 1/1CashInvestment in Saddlestone | Answer | Answer |
| AnswerCashIdentifiabl intangiblesInvestment in SaddlestoneStockholders’ equity-Saddlestone, 1/1 | Answer | Answer |
| Noncontrolling interest in Saddlestone | Answer | Answer |
| (R) | ||
| AnswerAmortization expenseCashIdentifiable intangiblesInvestment in Saddlestone | Answer | Answer |
| Goodwill | Answer | Answer |
| AnswerCashInvestment in SaddlestoneIdentifiable intangiblesAmortization expense | Answer | Answer |
| Noncontrolling interest in Saddlestone | Answer | Answer |
| (O) | ||
| AnswerDividends – SaddlestoneIdentifiable intangiblesCashAmortization expense | Answer | Answer |
| AnswerIdentifiable intangiblesDividends – SaddlestoneAmortization expenseCash | Answer | Answer |
| (N) | ||
| AnswerDividends – SaddlestoneIdentifiable intangiblesNoncontrolling interest in income of SaddlestoneCash | Answer | Answer |
| AnswerCashNoncontrolling interest in income of SaddlestoneIdentifiable intangiblesDividends – Saddlestone | Answer | Answer |
| Noncontrolling interest in Saddlestone | ||
onsolidation at End of First Year
(a) Calculate total goodwill and its allocation to the controlling and noncontrolling interests.
Calculation of goodwill is as follows:
| Acquisition cost ($10,000,000 + $300,000) | $ 10,300,000 | |
| Fair value of noncontrolling interest | 6,500,000 | |
| Total | 16,800,000 | |
| Book value of Saddlestone | $ 7,200,000 | |
| Identifiable intangibles | 2,000,000 | 9,200,000 |
| Goodwill | $ 7,600,000 |
Allocation of goodwill between controlling and noncontrolling interest:
| Total goodwill | $ 7,600,000 |
| Peak’s goodwill: $10,300,000 – 60%($9,200,000) | 4,780,000 |
| Goodwill to noncontrolling interest | $ 2,820,000 |
Calculate equity in net income for 2016, as reported on Peak’s books, and the noncontrolling interest in net income, as reported on the consolidated income statement for 2016.
2016 equity in net income and noncontrolling interest in net income:
| Total | Equity in NI | Noncontrolling interest in NI | |
| Saddlestone’s reported net income | $ 3,000,000 | $ 1,800,000 | $ 1,200,000 |
| Revaluation writeoff: | |||
| Identifiable intangibles $2,000,000/5 | (400,000) | (240,000) | (160,000) |
| $ 2,600,000 | $ 1,560,000 | $ 1,040,000 |
(c) Prepare the consolidation eliminating entries made at December 31, 2016.
c. Consolidation working paper eliminating entries for 2016:(C)
| Equity in net income of S | 1,560,000 | ||
| Dividends – Saddlestone | 600,000 | ||
| Investment in Saddlestone | 960,000 |
(E)
| Stockholders’ equity—Saddlestone, 1/1 | 7,200,000 | ||
| Investment in Saddlestone | 4,320,000 | ||
| Noncontrolling interest in Saddlestone | 2,880,000 |
(R)
| Identifiable intangibles | 2,000,000 | ||
| Goodwill | 7,600,000 | ||
| Investment in Saddlestone (1) | 5,980,000 | ||
| Noncontrolling interest in Saddlestone (2) | 3,620,000 |
(1) 60% x $2,000,000 + $4,780,000
(2) 40% x $2,000,000 + $2,820,000
(O)
| Amortization expense | 400,000 | ||
| Identifiable intangibles | 400,000 |
(N)
| Noncontrolling interest in income of Saddlestone | 1,040,000 | ||
| Dividends – Saddlestone | 400,000 | ||
| Noncontrolling interest in Saddlestone | 640,000 |
