Following are the individual financial statements for Gibson and Davis for the y
ID: 2470153 • Letter: F
Question
Following are the individual financial statements for Gibson and Davis for the year ending December 31, 2013:
Note: Parentheses indicate a credit balance.
Gibson acquired 60 percent of Davis on April 1, 2013, for $586,500. On that date, equipment owned by Davis (with a five-year remaining life) was overvalued by $69,000. Also on that date, the fair value of the 40 percent noncontrolling interest was $391,000. Davis earned income evenly during the year but paid the entire dividend on November 1, 2013.
A: Prepare a consolidated income statement for the year ending December 31, 2013 (input all as positive)
B:
Gibson Davis Sales $ (798,000 ) $ (418,500 ) Cost of goods sold 303,000 206,000 Operating expenses 273,000 62,500 Dividend income (18,000 ) 0 Net income $ (240,000 ) $ (150,000 ) Retained earnings, 1/1/13 $ (797,000 ) $ (457,000 ) Net income (240,000 ) (150,000 ) Dividends paid 60,000 30,000 Retained earnings, 12/31/13 $ (977,000 ) $ (577,000 ) Cash and receivables $ 254,500 $ 168,000 Inventory 591,000 272,000 Investment in Davis 586,500 0 Buildings (net) 569,000 605,000 Equipment (net) 486,000 408,000 Total assets $ 2,487,000 $ 1,453,000 Liabilities $ (880,000 ) $ (536,000 ) Common stock (630,000 ) (340,000 ) Retained earnings, 12/31/13 (977,000 ) (577,000 ) Total liabilities and stockholders’ equity $ (2,487,000 ) $ (1,453,000 )Explanation / Answer
A) consolidated statements- we conclude as follows, Gibson owns 60 % stock in Davis, so equity method of accounting should be used in identifying income. 60 % of Davis income should be added to Income of Gibson. Dividends should not be treated seperately
b) consolidated balances are
Common stock = $ 630000 ( i.e only common stock of Gibson will be recorded )
Dividends paid = $ 60000 ( i.e only dividend paid by Gibson will be recorded as we have taken net 60 % income from Davis in our books)
Building = 569000 ( Gibson) + 605000 ( Davis) , = 1174000 ( Davis Building Value will also be taken in Consolidated balance sheet as to give effect of equity investment in Davis)
Goodwill: Assuming fair value of Minority interest is calculated after adjusting for overvaluation of equipment, Goodwill will be NIL
as Minority interest = 40 % , $391000
Fair Value of business = Minority Interest / % share of Minority interest
= 391000/ 40 %, = 977500
Fair Value of 60 % share of Gibson = 977500 x 60 %, = 586500
Purchase consideration = 586500
Goodwill= Nil
Equipment - Equipment in Davis had a 5 year life at beiginning of year ( to be written off as 1/5 every year)
at end it has value of 408000, Value at the begining can be calculated as
408000 x 5/4, =510000 , where 5/4 is resiprocal of remaining depreciation proportion on equipment
Value at beginning = 510000
Overvaluation = 69000
So correct value should be 510000 - 69000,= 441000 to be written off in 5 years
depreciatiated value at end of year = 441000 x 4/ 5 ,= 352800
Value of equipment in consolidated books should be , = 386000 ( Gibson) + 352800 ( Davis), =738800
Individual Gibson Individual Davis Consolidated Gibson Sales 798000 418500 798000 Less: Cost of Goods sold 303000 206000 303000 Less: Operating expenses 273000 62500 273000 Add: Dividend Income 18000 Add: Equity income 90000 Net Income 240000 150000 312000