Background information Pound Company purchased 80% of the common stock of Sterling Inc. on April 1, 2019 for $6,000,000. The fair value of the remaining 20% of the common stock was $1,500,000 on that...

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Background information


Pound Company purchased 80% of the common stock of Sterling Inc. on April 1, 2019 for $6,000,000. The fair value of the remaining 20% of the common stock was $1,500,000 on that date. Also, at the acquisition date, the book values and fair values of Sterling’s assets and liabilities were as follows:



































































































Book Value




Fair Value



Cash



$200,0000



$200,000



Notes receivable



85,000



85,000



Accounts Receivable, net



980,000



980,000



Inventories



828,000



700,000



Land



1,560,000



2,100,000



Equipment



7,850,000



10,600,000



Accumulated Depreciation



(3,250,000)



(4,000,000)



Other assets



140,000



50,000





$8,393,000



$10,715,000









Notes payable



$115,000



$115,000



Accounts payable



400,000



400,000



Subordinated debentures (7%)



5,000,000



5,000,000



Common stock; par value $10 per share; authorized, issued, outstanding 100,000 shares





1,000,000





--



Additional paid-in capital



872,000



--



Retained earnings



1,006,000



--





$8,393,000






Additional information, including transactions that had occurred by the end of the year, December 31, 2019.


· The inventory on the books of Sterling on April 1 had been charged to cost of goods sold.


· Prior to April 1, 2019, Pound had purchased, at face value, $1,500,000 of Sterling’s 7% subordinated debentures. These debentures mature on October 31, 2026, with interest payable annually on October 31.


· As of the acquisition date, the Equipment had a remaining estimated useful life of six years. Sterling uses the straight-line method of depreciation. The appropriate adjustment to Depreciation Expense for Equipment (i.e., the debit side of the [E] entry) is $236,250.


· The Other Assets listed above consist entirely of long-term investments made by Sterling and do not include any investment in Pound.


· During the period April 1 to December 31, 2019, the following intercompany transactions occurred between Pound and Sterling:



























Intraentity sales




Pound to Sterling




Sterling to Pound



Sales



$158,000



$230,000



Included in buyer’s inventory at December 31, 2019



36,000



12,000



Balance unpaid at December 31, 2019



16,800



22,000




Pound sells merchandise to Sterling at cost. Sterling sells merchandise to Pound at regular selling price which includes a normal gross profit margin of 35 percent. There were no intraentity sales between the two companies prior to April 1, 2019. Any accrued interest on intercompany debt is recorded by each company in their respective accounts payable and accounts receivable accounts.



Background Information (concluded)


Pound’s revenue and expense balances are for the twelve months ended December 31, 2019. Sterling’s balances in these accounts are for the nine month period beginning April 1, 2019. The balance sheet account balances are as of December 31, 2019.












































































































































































Debits




Pound




Sterling



Cash



$822,000



$530,000



Notes receivable



--



85,000



Accounts receivable, net



2,758,000



1,368,400



Inventories



3,204,000



1,182,000



Land



4,000,000



1,560,000



Equipment



15,875,000



7,850,000



Accumulated depreciation, equipment



(6,301,000)



(3,838,750)









Buildings



1,286,000



--



Accumulated depreciation, buildings



(372,000)



--









Investment in Sterling



6,000,000



--



Investment in Sterling bonds



1,500,000



--



Other assets



263,000



140,000



Goodwill







Notes payable



--



(115,000)



Accounts payable



(1,364,000)



(204,000)



Long-term debt



(10,000,000)



--



Subordinated debentures—7%



--



(5,000,000)



Common stock



(2,400,000)



(1,000,000)



Additional paid-in capital



(240,000)



(872,000)



Retained earnings



(12,683,500)



(1,006,000)



Noncontrolling interest







Sales



(18,200,000)



(5,760,000)



Cost of goods sold



10,600,000



3,160,000



Selling, general, and admin. Expense



3,448,500



1,063,900



Depreciation expense, equipment



976,000



588,750



Depreciation expense, buildings



127,000



--



Equity in income of Sterling







Interest revenue



(105,000)



(1,700)



Interest expense



806,000



269,400














Required


Create an Excel spreadsheet that includes all of the items listed (1 through 4) below. You can use the

Consolidation Practice Worksheet Solution

(located in the Week 14 module) as a guide to formatting your worksheets. However,
DO NOT USE THAT Excel file. Each student is required to create their own new file in Excel beginning with a blank file. The use of any existing file, rather than a new file, will result in a score of zero on the assignment. Also, as mentioned above, this is an individual assignment and any evidence of sharing files with another individual will be considered a violation of academic integrity and will be referred to the relevant Chico State authorities.


1. (10 points) In one worksheet, prepare a consolidation spreadsheet using the December 31, 2019 pre-closing trial balance information for Pound and Sterling provided at the previous page. The equity method entry should be added to this trial balance. That will result in the addition of an

Equity in the Income of Sterling

account and an increase in the balance of the existing

Investment in Sterling

account.


2. (15 points) Program formulas in additional worksheets that result in the following consolidated financial statements: Income Statement; Statement of Retained Earnings; Balance Sheet (see format, Exhibit 4.7 on p. 173)


3. Prepare schedules that compute the following (10 points each):


a. Goodwill (as computed on April 1, 2019) (see formats on p. 57 and p. 163)


b. Equity income from Sterling (for the nine months ended December 31, 2019) (see format on p. 244)


c. Investment in Sterling as of December 31, 2019


d. Income attributable to the noncontrolling interest (for 2019)


e. Noncontrolling interest as of December 31, 2019 (see format on p. 245)


4. (25 points) Prepare a separate list of the consolidating entries, properly labeled, that are included in the consolidation spreadsheet. *G, *TL, *TA, S, A1, A2, I, D, E, TI, TL, TA, G, ED, P [note: it may be the case that some of these entries are not necessary]

Answered Same DayDec 18, 2021

Answer To: Background information Pound Company purchased 80% of the common stock of Sterling Inc. on April 1,...

Riddhi answered on Dec 18 2021
147 Votes
Financial Statements
    Pound Company
    Consolidated Income Statement
    For the year ended December 31, 2019
    Sales            $ 23,888,000
    Interest Revenue            $ 163,200
    Cost of Goods sold            (13,631,500)
    Gross profit            10,419,700
    Op
erating expenses            (7,515,800)
    Consolidated Net income            $ 2,903,900
     To noncontrolling interest            (152,030)
     To controlling interest            $ 2,751,870
    Consolidated Statement of Changes in Owners' Equity
    For the year ended December 31, 2019
        Retained Earnings    Common Stock    Noncontrolling Interest
    Balance, January 1    $ 12,683,500    $ 2,400,000    $ 1,462,450
    Net Income    2,751,870    -    - 0
    less: Dividends    - 0    -    - 0
    Balance, December 31    $ 15,435,370    $ 2,400,000    $ 1,462,450
    Consolidated Balance Sheet
    as of December 31, 2019
        Assets
    Cash        $ 1,352,000
    Notes receivable        $ 85,000
    Accounts receivable        4,121,200
    Inventories        4,362,000
    Investment in sterling bonds        1,500,000
     Total current assets        11,420,200
    Property, plant & equipmet, net        22,037,750
    Other assets        403,000
    Goodwill        2,300,000
     Total assets        $ 36,160,950
        Liabilities
    Accounts payable        1,562,800
    Notes payable        115,000
    Long term Debt        10,000,000
    Subordinated debentures 7%        5,000,000
    Other liabilities        185,330
     Total liabilities        $ 16,863,130
        Owners' Equity
    Common stock        2,400,000
    Noncontrolling interest        1,462,450
    Retained earnings        15,435,370
     Total liabilities and owners' equity        $ 36,160,950
Goodwill computation
    Computation and allocation of Goodwill
    Fair value of consideration transferred by Pound        $ 6,000,000
    Fair value of noncontrolling interest        $ 1,500,000
    Fair value of Sterling, 1/4/19            $ 7,500,000
    Book value of Sterling, 1/4/19            $ 2,878,000
    Excess of fair value over book value            $ 4,622,000
    Allocations made to specific accounts based on acquisition-date fair and book value differences
    Inventories        $ (128,000)
     PP&E        $ 2,540,000
     Other Assets        $ (90,000)
                $ 2,322,000
    Goodwill            $ 2,300,000
        Controlling Interest    Non-controlling Interest    Total
    Acquisition-date fair value of Sterling    $ 6,000,000    $ 1,500,000    $ 7,500,000
    Relative fair value of Sterling net assets    $ 4,160,000    $ 1,040,000    $ 5,200,000
    Goodwill    $ 1,840,000    $ 460,000    $ ...
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