Question

Miller Company acquired an 80 percent interest in Taylor Company on January 1, 2019. Miller paid $744,000 in cash to the owners of Taylor to acquire these shares. In addition, the remaining 20 percent of Taylor shares continued to trade at a total value of $186,000 both before and after Miller’s acquisition.

On January 1, 2019, Taylor reported a book value of $530,000 (Common Stock = $265,000; Additional Paid-In Capital = $79,500; Retained Earnings = $185,500). Several of Taylor’s buildings that had a remaining life of 20 years were undervalued by a total of $70,600.



During the next three years, Taylor reports income and declares dividends as follows:



Year Net Income Dividends
2019 $ 61,900 $ 8,900
2020 80,100 13,400
2021 89,300 17,900


Determine the appropriate answers for each of the following questions:

What amount of excess depreciation expense should be recognized in the consolidated financial statements for the initial years following this acquisition?

If a consolidated balance sheet is prepared as of January 1, 2019, what amount of goodwill should be recognized?

If a consolidation worksheet is prepared as of January 1, 2019, what Entry S and Entry A should be included?

On the separate financial records of the parent company, what amount of investment income would be reported for 2019 under each of the following accounting methods?

The equity method.
The partial equity method.
The initial value method.
On the parent company’s separate financial records, what would be the December 31, 2021, balance for the Investment in Taylor Company account under each of the following accounting methods?

The equity method.
The partial equity method.
The initial value method.
As of December 31, 2020, Miller’s Buildings account on its separate records has a balance of $716,000 and Taylor has a similar account with a $268,500 balance. What is the consolidated balance for the Buildings account?

What is the balance of consolidated goodwill as of December 31, 2021?

Assume that the parent company has been applying the equity method to this investment. On December 31, 2021, the separate financial statements for the two companies present the following information:



Miller Company Taylor Company
Common stock $ 447,500 $ 265,000
Additional paid-in capital 250,600 79,500
Retained earnings, 12/31/21 554,900 376,600


What will be the consolidated balance of each of these accounts?

Answer 1

To address these questions, we'll go through each one step by step:

1. Excess depreciation expense:
To determine the excess depreciation expense, we need to find the undervalued buildings. The total undervaluation is $70,600, and these buildings have a remaining life of 20 years. The annual excess depreciation expense would be $70,600 / 20 = $3,530.

2. Goodwill recognized as of January 1, 2019:
To calculate the goodwill, we need to find the excess of the purchase price over the fair value of net assets acquired. The purchase price is $744,000, and the fair value of net assets is ($530,000 + $70,600) = $600,600. The goodwill would be $744,000 - $600,600 = $143,400.

3. Consolidation worksheet entries as of January 1, 2019:
Entry S (Sheets) would include the 80% acquisition of Taylor:
Debit: Investment in Taylor $744,000
Credit: Cash $744,000

Entry A (Adjustment) would account for the undervalued buildings:
Debit: Buildings $70,600
Credit: Accumulated Depreciation $70,600

4. Investment income on parent company's separate records for 2019:
- Equity method: The parent would recognize its share of Taylor's net income. 80% of $61,900 is $49,520.
- Partial equity method: The parent would recognize its share of Taylor's net income minus dividends received. 80% of ($61,900 - $8,900) is $41,440.
- Initial value method: No investment income is recognized.

5. Investment in Taylor Company account balance on parent company's separate records as of December 31, 2021:
- Equity method: The balance would be the initial investment plus the accumulated equity earnings. $744,000 + 80% of ($61,900 + $80,100 + $89,300) = $1,253,120.
- Partial equity method: The balance would be the initial investment plus the accumulated partial equity earnings. $744,000 + 80% of ($61,900 + $80,100 + $89,300 - $8,900 - $13,400 - $17,900) = $1,172,000.
- Initial value method: The balance would be the initial investment. $744,000.

6. Consolidated balance for the Buildings account as of December 31, 2020:
The consolidated balance for the Buildings account would be the sum of Miller's Buildings and Taylor's Buildings balances, adjusted for the 80% acquisition.
$716,000 (Miller) + 80% of $268,500 (Taylor) = $716,000 + $214,800 = $930,800.

7. Balance of consolidated goodwill as of December 31, 2021:
To calculate the consolidated goodwill, we need to compare the purchase price of Taylor's shares to the fair value of net assets acquired. As of December 31, 2021, the fair value of net assets is ($447,500 + $250,600 + $554,900) - ($265,000 + $79,500 + $376,600) = $1,151,400. The consolidated goodwill would be $744,000 (purchase price) - $1,151,400 (fair value of net assets) = -$407,400.

Please note that negative goodwill indicates a bargain purchase, where the fair value of net assets is higher than the purchase price.

If you have any further questions or need additional clarification, feel free to ask!