Patrick Corporation acquired 100 percent of OBrien Companys

Patrick Corporation acquired 100 percent of O’Brien Company’s outstanding common stock on January 1, for $637,300 in cash. O’Brien reported net assets with a carrying amount of $358,000 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:

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Patrick Corporation acquired 100 percent of O\'Brien Company\'s outstanding common stock on January 1, for $637,300 in cash. O\'Brien reported net assets with a carrying amount of $358,000 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) Customer relationships (5-year remaining life) Equipment (10-year remaining life) $75,000 258,000 93,600 301,100 359,000 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 $ (1,822,500) O Brien Revenues Cost of goods sold Depreciation expense Amortization expense Income from O\'Brien 486,000 93,000 38,400 (295,578) $ (748,000) 342,000 97,500 $ (1,500,670) $ (764,000) (1,500,670) Net income $ (308,500) Retained earnings 1/1 Net income (345,000) (308,500) Dividends declared 146,000 84,000 Retained earnings 12/31 $ (2,118,670) $ (569,500) Cash Receivables Inventory Investment in O\'Brien Trademarks Customer relationships Equipment (net) Goodwil1 279,000 358,000 $ 148,500 77,100 224,000 196,00 935,870 542,000 76, 200 272,000 $ 797,800 1,028,000 Total assets $ 3,338,870 $ (820,200) Liabilities Common stock Retained earnings 12/31 $ (128,300) (100,000) 569,500 $(3,338,870) (797,800) (400,000) 2,118,670(69.so Total liabilities and equity a. Which investment method did Patrick use to compute the $295,570 income from O\'Brien? b. Determine the totals to be reported for this business combination for the year ending December 31 c. Verify the totals determined in part (b) by producing a consolidation worksheet for Patrick and O\'Brien for the year ending December 31.

Solution

1 Equity method of investment is used by Patrick to compute the income from O\'Brien Net income of O\'Brien $308,500 Less: Amortization of customer relationships ($18,720) Add: Excess Depreciation charged for equipment $5,790 Income from O\'Brien $295,570 Customer relationship $93,600 Estimated life 5 years Annual amortization $18,720 Equipment book value $359,000 Fair value $301,100 Difference $57,900 Estimated life 10 years Excess depreciation charged on book value $5,790 2 Totals to be reported for this business combination for the year ending December 31 Totals Revenues ($2,570,500) Cost of goods sold $828,000 Amortization expenses $57,120 Depreciation expenses $184,710 Income of O\'Brien $0 Net income ($1,500,670) Retained Earnings, 1/1 ($764,000) Dividends declared $146,000 Retained Earnings, 31/12 ($2,118,670) Cash $427,500 Receivables $435,100 Inventory $420,000 Investment in O\'Brien $0 Trademarks $801,200 Customer Relationships $74,880 Equipment $1,247,890 Goodwill $60,600 Total Assets $3,467,170 Liabilities ($948,500) Common Stock ($400,000) Retained Earnings, 31/12 ($2,118,670) Total liabilities and equities ($3,467,170) 3 Consolidation Worksheet Consolidation entries Consolidated Accounts Patrick O\'Brien Debit Credit Totals Revenues ($1,822,500) ($748,000) ($2,570,500) Cost of goods sold $486,000 $342,000 $828,000 Amortization expenses $38,400 $0 $18,720 $57,120 Depreciation expenses $93,000 $97,500 $5,790 $184,710 Income of O\'Brien ($295,570) $0 $295,570 $0 Net income ($1,500,670) ($308,500) ($1,500,670) Retained Earnings, 1/1 ($764,000) ($345,000) $345,000 ($764,000) Net income ($1,500,670) ($308,500) ($1,500,670) Dividends declared $146,000 $84,000 $84,000 $146,000 Retained Earnings, 31/12 ($2,118,670) ($569,500) ($2,118,670) Cash $279,000 $148,500 $427,500 Receivables $358,000 $77,100 $435,100 Inventory $196,000 $224,000 $420,000 Investment in O\'Brien $935,870 $935,870 $0 Trademarks $542,000 $76,200 $183,000 $801,200 Customer Relationships $0 $0 $93,600 $18,720 $74,880 Equipment $1,028,000 $272,000 $5,790 $57,900 $1,247,890 Goodwill $0 $0 $60,600 $60,600 Total Assets $3,338,870 $797,800 $3,467,170 Liabilities ($820,200) ($128,300) ($948,500) Common Stock ($400,000) ($100,000) $100,000 ($400,000) Retained Earnings, 31/12 ($2,118,670) ($569,500) ($2,118,670) Total liabilities and equities ($3,338,870) ($797,800) $1,102,280 $1,102,280 ($3,467,170) Working note: Goodwill calculation Cost paid for acquisition $637,300 Less: Common Stock ($358,000) Excess of fair value over book value $279,300 Trademarks $183,000 Customer relationships $93,600 Equipment ($57,900) Goodwill $60,600