Student Name:
Class:
Problem 03-24
Part a. Michael Company and Aaron Company
- Fair Value allocation and Annual Amortization
Aaron fair value
Book value of subsidiary
Excess fair over book value
Assigned to specific accounts
based on fair market value:
Royalty agreements
Trademark
Total
$
$
470,000
(360,000)
110,000
Correct!
Life
(years)
$
$
60,000
50,000
110,000
Annual
Excess
Amortizations
6 $
10,000
10
5,000
$
15,000
Correct!
Correct!
-Conversion to initial value method for years prior to 2013
Aaron retained earnings, 1/1/13
Retained earnings at date of purchase
Increase since date of purchase
Excess amortization expenses
Conversion to equity method for years
prior to 2013
$
$
$
490,000
(230,000)
260,000
(60,000)
200,000
Correct!
Student Name:
Class:
Problem 03-24
Part a. Consolidated Worksheet
MICHAEL COMPANY AND CONSOLIDATED SUBSIDIARY
Consolidation Worksheet
For Year Ending December 31, 2013
Revenues
Cost of goods sold
Amortization expense
Dividend income
Net income
Michael
Aaron
Company
Company
$
(610,000) $ (370,000)
270,000
140,000
115,000
80,000 [E]
(5,000)
- [I]
$
(230,000) $ (150,000)
Retained earnings, 1/1
Accounts
Cash
Receivables
Inventory
Investment in Aaron Co.
Liabilities
Preferred stock
Common stock
Additional paid-in capital
Retained earnings, 12/31
Total liabilities and equity
110,000
380,000
560,000
470,000
460,000
920,000
2,900,000
(490,000) [S]
(150,000)
5,000
(635,000)
15,000
220,000
280,000
- [C]
340,000
380,000 [A]
### [A]
$ 1,235,000
(780,000) $ (470,000)
(300,000)
(500,000)
(100,000) [S]
(300,000)
(30,000) [S]
(1,020,000)
(635,000)
$ (2,900,000) $ (1,235,000)
(360,000)
200,000 $ (1,080,000)
490,000
[I]
5,000
(360,000)
90,000
$ (1,350,000)
$
200,000 [S]
[A]
620,000
50,000
20,000 [E]
30,000 [E]
10,000
5,000
Parentheses indicate a credit balance.
Consolidated
Totals
$ (980,000)
410,000
210,000
$
[C]
(230,000)
90,000
$ (1,020,000) $
15,000
5,000
(880,000)
Net income
Dividends paid
Retained earnings, 12/31
Copyrights
Royalty agreements
Trademark
Total assets
Consolidation Entries
Debit
Credit
100,000
30,000
125,000
600,000
840,000
800,000
1,310,000
25,000
$ 3,700,000
$ (1,250,000)
(300,000)
(500,000)
(300,000)
(1,350,000)
$ (3,700,000)
Student Name:
Class:
Problem 03-24
Part b. Equity method - What account balances would be altered
on Michael's financial statements?
Account
Equity in Earning of Aaron
Retained earning, 1/1/13
Investment in Aaron
New
Balance
$
135,000
1,080,000
800,000
Correct!
Correct!
Correct!
Part c. Equity method - What changes would be necessary in the
consolidation entries in the December 31, 2013
Consolidation Worksheet?
No Entry *C is needed on the worksheet if the equity method is applied.
Both the investment account as well as the beginning retained earnings
would be stated appropriately.
Entry I would have been used to eliminated the $135,000 Equity in earnings of
Aaron from the parent's income statement and from the
"Investment in Aaron Co." account.
Entry D would eliminate the $5,000 current year dividend from
"Dividend Paid" and the "Investments in Aaron" account balances.
Part d. Equity method - What changes would be created in the
consolidation figures to be reported by this combination.
Consolidated figures are not affected by the investments method used by
the parent. The parent company balances would differ and changes
would be required in the worksheet entries. However, the figures to be
reported do not depend on the parent's selection of a method.
Correct!
Correct!
Correct!
Correct!
Correct!
Correct!
Correct!
Correct!
Correct!
Correct!
Correct!
Correct!
Correct!
Correct!
Correct!
Correct!
Correct!
Correct!
Correct!
Correct!
Correct!
Given Data P03-27:
MICHAEL COMPANY
Aaron Company outstanding common stock
acquired by Michael Company
Michael Company's $1 par common stock issued
for acquisition - number of shares
Fair market value of Michael stock - per share
Aaron' reported retained earnings at date of purchase
Book value for Aaron at date of purchase
Aaron's royalty agreements undervalued by
Remaining life of Aaron's royalty agreements - years
Fair value of Aaron's trademark
Remaining life of Aaron's trademark - years
Revenues
Cost of goods sold
Amortization expense
Dividend income
Net income
20,000
$
$
$
$
23.50
230,000
360,000
60,000
6
50,000
10
Michael
Aaron
Company
Company
12/31/2013
12/31/2013
$
(610,000) $
(370,000)
270,000
140,000
115,000
80,000
(5,000)
$
(230,000) $
(150,000)
Retained earnings, 1/1/13
Net income
Dividends paid
Retained earnings, 12/31/13
Cash
Receivables
Inventory
Investment in Aaron Company
Copyrights
Royalty agreements
Total assets
Liabilities
Preferred Stock
Common stock
Additional paid-in capital
Retained earnings, 12/31/13
Total liabilities and equity
100%
(880,000) $
(230,000)
90,000
$ (1,020,000) $
$
$
110,000 $
380,000
560,000
470,000
460,000
920,000
2,900,000 $
(490,000)
(150,000)
5,000
(635,000)
15,000
220,000
280,000
340,000
380,000
1,235,000
(780,000) $
(470,000)
(300,000)
(500,000)
(100,000)
(300,000)
(30,000)
(1,020,000)
(635,000)
$ (2,900,000) $ (1,235,000)
