Question

Patrick Corporation acquired 100 percent of O’Brien Company’s outstanding common stock on January 1, for $628,000...

Patrick Corporation acquired 100 percent of O’Brien Company’s outstanding common stock on January 1, for $628,000 in cash. O’Brien reported net assets with a carrying amount of $363,000 at that time. Some of O’Brien’s assets either were unrecorded (having been internally developed) or had fair values that differed from book values as follows:

Book
Values		 Fair
Values
Trademarks (indefinite life) $ 101,500 $ 249,500
Customer relationships (5-year remaining life) 0 91,200
Equipment (10-year remaining life) 364,000 323,800

Any goodwill is considered to have an indefinite life with no impairment charges during the year.

Following are financial statements at the end of the first year for these two companies prepared from their separately maintained accounting systems. O’Brien declared and paid dividends in the same period. Credit balances are indicated by parentheses.

Patrick O'Brien
Revenues $ (1,305,000 ) $ (828,000 )
Cost of goods sold 348,000 382,000
Depreciation expense 82,200 95,400
Amortization expense 32,200 0
Income from O'Brien (336,380 ) 0
Net income $ (1,178,980 ) $ (350,600 )
Retained earnings 1/1 $ (882,000 ) $ (274,000 )
Net income (1,178,980 ) (350,600 )
Dividends declared 160,000 98,000
Retained earnings 12/31 $ (1,900,980 ) $ (526,600 )
Cash $ 208,000 $ 121,000
Receivables 416,000 78,900
Inventory 269,000 139,000
Investment in O'Brien 877,380 0
Trademarks 480,000 64,200
Customer relationships 0 0
Equipment (net) 1,014,000 292,000
Goodwill 0 0
Total assets $ 3,264,380 $ 695,100
Liabilities $ (963,400 ) $ (68,500 )
Common stock (400,000 ) (100,000 )
Retained earnings 12/31 (1,900,980 ) (526,600 )
Total liabilities and equity $ (3,264,380 ) $ (695,100 )

  1. Which investment method did Patrick use to compute the $336,380 income from O'Brien?

  2. Determine the totals to be reported for this business combination for the year ending December 31.

  3. Verify the totals determined in part (b) by producing a consolidation worksheet for Patrick and O’Brien for the year ending December 31.

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