Question

# Parent Industries bought Subsidiary Inc.’s voting stock on January 1, 2019 for \$42,000, when Subsidiary’s book...

1. Parent Industries bought Subsidiary Inc.’s voting stock on January 1, 2019 for \$42,000, when Subsidiary’s book value was \$8,000. Fair value information on Subsidiary’s assets and liabilities at the date of acquisition is as follows:

• Property and equipment (P&E) is overvalued by \$7,000. P&E has a 10-year remaining life, straight-line.
• Previously unreported identifiable intangibles are valued at \$8,000. These intangibles have indefinite lives, but testing reveals impairment of \$2,000 in 2019 and \$1,000 impairment in 2020.
• Goodwill reported for this acquisition is not impaired in 2019, but is impaired by \$3,000 in 2020.

Parent uses the complete equity method to account for its investment in Subsidiary on its own books. It is now December 31, 2020, two years since the acquisition. The consolidation working paper at December 31, 2020, with the separate trial balances of Parent and Subsidiary is attached to this exam.

1. Prepare a schedule calculating the initial value of goodwill for this acquisition. Show your work in detail.

1. Calculate Parent’s equity in net income of Subsidiary for 2020. Show your work in detail.

c.          prepare the required entries to prepare consolidated financial statements at December 31, 2020.

#### Homework Answers

Answer #1

Solution a)

Initial value of the Goodwill at the time of the acquisition.

Fair value of Assets & liabilities = 8,000

Adjustments:-

Add:- Overvaluation of PPE = 7,000

Add:- Unrecorded Intangible asset book = 8,000

A. Fair value of the business   = 23,000

B. Purchase consideration   = 42,000

Initial value of goodwill (B-A) = 19,000

Solution b)

Value of the equity as on 31/12/2020

Subsidiary Book value (assume as same) = 8,000

PPE ( 7000 - 7000/10*2) (2 yr depretiation deducted) = 5,600

Unrecorded intangible asset (8,000- 2,000 -1,000) = 5,000

Goodwill (19,000 - 3,000)(impairement) = 16,000

Total value = \$ 34,600

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