Dr. M.D.

Chase
Advanced Accounting-305-16B

Long Beach State University

Purchase: Analysis/Eliminations
Page 1

I. PURCHASE EXAMPLE WITH ANALYSIS, ELIMINATIONS AND WORKSHEET

Facts:
1.

P" pays $790,000 for 80% of "S" (8,000) shares on 3/1/x1.

2.

$25,000 of direct acquisition costs are also incurred in the purchase, of which $15,000 covered SEC related expenses.

3.

At the time of the purchase "S" had the following balance sheet:
Historical
Assets
Inventory..........................

Dr. (Cr)

Cost
$

Land...............................

FMV

75,000 $

Difference
80,000

150,000

200,000

Building ..........................

600,000

500,000

A/D-Building..

(300,000)

Equipment..........................

150,000

A/D-Equipment.

(50,000)

Goodwill...........................

5,000
50,000
200,000 net

80,000

( 20,000)
Note the presence of pre-existing
GWWhat implications does this
have for your analysis?

125,000

Total assets................. $

750,000

Liabilities and Equities

Current............................

Bonds (6% due 12/31/x4)......

50,000 $
200,000

50,000

Common Stock ($10 par)......... 100,000

n/a

PIC in excess of par

150,000

n/a

250,000

n/a

Retained earnings..............
Total liabilities........

186,752

750,000

0
13,248

243,248

194,598

.8

Remember: This represents the

excess of cost>BV necessary to bring
all the accounts up to FMV

OTHER DATA:
a)

the remaining life of the building is 20 years

b)

the remaining life of the equipment is 5 years

c)

the market rate of interest on the bond is 8%.

d)

S had net income of $70,000 (of which $10,000 was earned prior to 3/1/x1) and paid dividends of $20,000 in year x1.

e)

During year x1 "P" and "S" had the following totals:

"P"
Sales....

350,000

"S"
210,000

COS.....

150,000

80,000

Expenses....

120,000

60,000

REQUIRED:
a.

This is critical information. Remember, P is not

entitled to consolidate income earned by S prior
to the purchase. This represents Purchased NI
and must be accounted for (eliminated) during the
analysis of the investment.

Analyze the investment

b. Analyze the investment assuming that "P" had paid only $490,000 instead of $790,000 as above.
c.

Analyze the investment assuming that "P" had paid only $390,000.

d. present the consolidated elimination entries for requirement a.

e.

compute total NI; MI NI; controlling NI; MI

f.

prepare the consolidated worksheet

Dr. M.D. Chase

Advanced Accounting-305-16B

Long Beach State University

Purchase: Analysis/Eliminations
Page 2

SOLUTION-REQUIREMENT
a: Analyze the investment:
A.

Analysis based on cost of $790,000

Cost ($790,000 + $10,000)............................ $

Purchased BV C/S:

Remember: All charges related to SEC or stock

issuance costs are expensed in a purchase
consolidation; other charges are capitalized.

800,000

100,000

PIC:

150,000

RE:

250,000
500,000 (.8) ..........

400,000

Excess of cost over BV....................................

400,000

Add: Preexisting GW (125,000)(.8)...............

Be certain you note how pre-existing GW is

treated

100,000

Adjusted excess:.............................................

500,000

As noted on the prior page, Purchased NI is

another problematic issue. Do you understand
what it is and how it was computed?

Attributable to:
Purchased net income: ................

8,000

FMV accounts (CA;Liabilities;MES):

Inventory (.8)(5,000).....

4,000

Liabilities (.8)(13,248)..........

10,598

Available to NCA:

Purchased NI is Subsidiary NI earned prior to

the purchase in the year of purchase. This is
income that P is not entitled to include in the
consolidated net income and therefore must be
accounted for in the purchase.

22,598

477,402

NCA:
Land (.8)(50,000).................
Building (.8)(200,000)............
Equipment (.8)(20,000 cr).....

In this case you were told that S earned

$10,000 prior to acquisition. Since P acquired
and 80% interest, purchased NI is 10,000(.8)
or $8,000

40,000
160,000
184,000

(16,000)

Balance to Goodwill...................

293,402

SOLUTION-REQUIREMENT b: Analysis based on cost of $490,000

Cost ($490,000 + $10,000).................
Purchased BV C/S:

500,000

100,000

PIC:

150,000

RE:

250,000
500,000 (.8) ..........

400,000

Excess of cost over BV....................................

100,000

Add: Preexisting GW....

It is essential to take note that this is GW created

by the purchase after eliminating (adding back) the
pre-existing GW. REMEMBER: ALL GOODWILL
RECOGNIZED IN THE CONSOLIDATION MUST BE
A RESULT OF THE PURCHASE AND NOT PREEXISTING

100,000

Adjusted excess:.............................................

200,000

Attributable to:
Purchased net income: ................

8,000

FMV accounts (CA;Liabilities;MES):

Inventory (.8)(5,000)
Liabilities (.8)(13,248)..........

4,000

402

10,598

22,598

Available to NCA:

177,402

NCA: Land (See table)..................

38,308

Building (See table)..............

155,771

Equipment (.8)(20,000 cr)....... . (16,667)

Excess available to GW................

177,402
-0-

Excess Available to NCA + (BV of NCA)(% ownership)

$177,402 + (150,000+300,000+100,000)(.8)= $617, 402
Allocate to NCA in proportion of relative FMV;
Rel. $
Rel %
Adj.
NCA
FMV
FMV
TV
Val
BV
Land
200
200/
617,402
158,308
120,000
780
Build
500
500/
617,402
395,771
240,000
780
Equip
80
80/7
617,402
63,323
80,000
80
Total 780
780/
617,402
780

Adj.
Req.
38,308
155,771
(16,667)
177,402

Dr. M.D. Chase

Advanced Accounting-305-16B

Long Beach State University

Purchase: Analysis/Eliminations
Page 3

SOLUTION-REQUIREMENT c: Analysis based on cost of $390,000

Cost ($390,000 + $10,000)............
Purchased BV C/S:

400,000

100

PIC:

150

RE:

250

500 (.8) .....

400,000

Excess of cost over BV....................................

-0-

Add: Preexisting GW.......................................

100,000

Adjusted excess:.............................................

100,000

Attributable to:
Purchased net income: .....

8,000

FMV accounts (CA;Liabilities;MES):

Inventory (.8)(5,000).............

4,000

Liabilities (.8)(13,248)..........

10,590

22,598

Available to NCA:
NCA:

Adj.
Req.
12,667
91,668
(26,933)
77,402

77,402

Land (See table).

12,667

Building (See table)..........

Equipment (See table)....

Excess Available to NCA + (BV of NCA)(% ownership)

$77,402 + (150,000+300,000+100,000)(.8)= $517, 402
Allocate to NCA in proportion of relative FMV;
Rel. $
Rel %
Adj.
NCA
FMV
FMV
TV
Val
BV
Land
200
200/
517,402
132,667
120,000
780
Build
500
500/
517,402
331,668
240,000
780
Equip
80
80/7
517,402
53,067
80,000
80
Total 780
780/
617,402
780

91,668
(26,933) 77,402

Excess available to GW................

-0-

SOLUTION-REQUIREMENT d: Consolidated elimination entries based on requirement (a) (Parent is on the equity method)
a. Eliminate current year investment account entries:
Equity in "S" NI........................ 48,000
Dividends............................

16,000

Investment in "S"....................

32,000
You are expected to understand how to use the
effective interest method of bond amortization
necessary to solve this problem. If you dont, please
review your Intermediate Accounting and/or see me
at office hours.

b. Eliminate "P" pro rata share of "S" SHE:

"S" C/S (.8)($100,000).................. 80,000
"S" PIC (.8)($150,000)................. 120,000
"S" RE (.8)($250,000)................. 200,000
Investment in "S"...................

400,000

c. Allocate the excess of cost over book value per analysis:

Purchased NI (.8)(10,000).........

8,000

COS (inventory assumes FIFO)(.8)($5,000)..

4,000

Liabilities (per analysis)................

10,598

Land (.8)($50,000)..................

40,000

A/D Building (.8)($200,000)...............

160,000

Goodwill (per analysis).....

193,402

Equipment (.8)($20,000)..............

**

Carrying value of bonds at 1/1/x1: $200,000 (.8) =

Less: discount

(200,000-186,752)(.8)

160,000

10,598

Carrying Value

149,402

16,000

Investment in "S"....................

400,000

d. Amortize the excess of cost over book value (the dif. between values based on "P" life and values and "S" life and values)
Depreciation expense (8,000)(10/12).

6,667

Year

Bond Amortization Expense (2,352)(10/12) 1,960

A/D (16,000/5) (10/12)....................

2,667

A/D PP&E ($160,000/20) (10/12)......

6,667

Discount on B/P (2,352)(10/12).......

1,960**

Depreciation expense-building........

2,667

Note that GW is not subject to amortization; GW is

checked annually for impairment and written off
against NI (expensed) if its value has declined

8%

6%

Effective

Stated

Rate

Rate

Amort.

Carrying
Value

149,402

11,592

9,600

2,352

151,754

12,140

9,600

2,540

154,294

12,344

9,600

2,744

157,038

12,563

9,600

2,963

160,001

Total

48,639

10,599

Dr. M.D. Chase

Advanced Accounting-305-16B

Long Beach State University

Purchase: Analysis/Eliminations
Page 4

e. compute total net income, MI net income and controlling interest net income
Adjustments/Eliminations
_

"P" Inc.

"S" Inc.

Sales........................................

(350,000)

(210,000)

Cost of goods sold...........................

150,000

80,000

Expenses.....................................

120,000

60,000

Dr

230,000
6,667

Amortization Expense (Downstream)............

1,960
(2,667)

Depreciation Expense-Building (Downsream)

( 80,000)

185,960

( 70,000)
8,627

( 2,667)

Total net [income] loss......................

to Minority interest (MI%)(SIGNI+UPCR-UPDR)=(.2)(70,000)............................................
to Controlling interest PIGNI+P%(SADJNI)+DNCR-DNDR)=-(80,000)+(.8)(70,000)+2,667-8,627.............
Total Income of the Consolidated Entity

Net Income
( 560,000)

Depreciation Expense (Downstream)............

Internally Generated Net Income..............

Consolidated

CR

( 144,040)
14,000 income
130,040 income
(144,040)

SOLUTION-REQUIREMENT f: The consolidated worksheet can be created and checked against the results of part e above.