Accounting Excel Project

Computer
Project

Alternative
Investment Methods, Goodwill Impairment, and Consolidated Financial Statements

In
this project, you are to provide an analysis of alternative accounting methods
for controlling interest investments and subsequent effects on consolidated
reporting. The project requires the use of a computer and a spreadsheet
software package (e.g., Microsoft Excel, etc.). The use of these tools allows
you to assess the sensitivity of alternative accounting methods on consolidated
financial reporting without preparing several similar worksheets by hand. Also,
by modeling a worksheet process, you can develop a better understanding of
accounting for combined reporting entities.

Page 142

Consolidated
Worksheet Preparation

You
will be creating and entering formulas to complete four worksheets. The first
objective is to demonstrate the effect of different methods of accounting for
the investments (equity, initial value, and partial equity) on the parent
company’s trial balance and on the consolidated worksheet subsequent to
acquisition. The second objective is to show the effect on consolidated
balances and key financial ratios of recognizing a goodwill impairment loss.

The
project requires preparation of the following four separate worksheets:

1. Consolidated
   information worksheet (follows).
2. Equity
   method consolidation worksheet.
3. Initial
   value method consolidation worksheet.
4. Partial
   equity method consolidation worksheet.

If
your spreadsheet package has multiple worksheet capabilities (e.g., Excel), you
can use separate worksheets; otherwise, each of the four worksheets can reside
in a separate area of a single spreadsheet.

In
formulating your solution, each worksheet should link directly to the first
worksheet. Also, feel free to create
supplemental schedules to enhance the capabilities of your worksheet.

Project
Scenario

Pecos
Company acquired 100 percent of Suaro’s outstanding stock for $1,450,000 cash
on January 1, 2012, when Suaro had the following balance sheet:

Assets	Liabilities and Equity
Cash	$ 37,000	Liabilities	$(422,000)
Receivables	82,000
Inventory	149,000	Common stock	(350,000)
Land	90,000	Retained earnings	(126,000)
Equipment (net)	225,000
Software	315,000
Total assets	$898,000	Total liabilities and equity	$(898,000)

At
the acquisition date, the fair values of each identifiable asset and liability
that differed from book value were as follows:

Land	$ 80,000
Brand name	60,000	(indefinite life—unrecognized on Suaro’s books)
Software	415,000	(2-year estimated useful life)
In-process R&D	300,000

Additional
Information

• Although
  at acquisition date Pecos expected future benefits from Suaro’s in-process
  research and development (R&D), by the end of 2012, it became clear
  that the research project was a failure with no future economic benefits.

• During
  2012, Suaro earns $75,000 and pays no dividends.

• Selected
  amounts from Pecos and Suaro’s separate financial statements at December
  31, 2013, are presented in the consolidated information worksheet. All
  consolidated worksheets are to be prepared as of December 31, 2013, two
  years subsequent to acquisition.

• Pecos’s
  January 1, 2013, Retained Earnings balance—before any effect from Suaro’s
  2012 income—is $(930,000) (credit balance).

• Pecos
  has 500,000 common shares outstanding for EPS calculations and reported
  $2,943,100 for consolidated assets at the beginning of the period.

Page 143

Following
is the consolidated information worksheet.

A	B	C	D
1	December 31, 2013, trial balances
2
3		Pecos	Suaro
4	Revenues	($1,052,000)	($427,000)
5	Operating expenses	$ 821,000	$262,000
6	Goodwill impairment loss	?
7	Income of Suaro	?
8	Net income	?	($165,000)
9
10	Retained earnings—Pecos 1/1/13	?
11	Retained earnings—Suaro 1/1/13		($201,000)
12	Net income (above)	?	($165,000)
13	Dividends paid	$ 200,000	$ 35,000
14	Retained earnings 12/31/13	?	($331,000)
15
16	Cash	$ 195,000	$ 95,000
17	Receivables	$ 247,000	$143,000
18	Inventory	$ 415,000	$197,000
19	Investment in Suaro	?
20
21
22
23	Land	$ 341,000	$ 85,000
24	Equipment (net)	$ 240,100	$100,000
25	Software		$312,000
26	Other intangibles	$ 145,000
27	Goodwill
28	Total assets	?	$932,000
29
30	Liabilities	($1,537,100)	($251,000)
31	Common stock	($ 500,000)	($350,000)
32	Retained earnings (above)	?	($331,000)
33	Total liabilities and equity	?	($932,000)
34
35	Fair value allocation schedule
36	Price paid	$1,450,000
37	Book value	$ 476,000
38	Excess initial value	$ 974,000	Amortizations
39	to land	($ 10,000)	2012	2013
40	to brand name	$ 60,000	?	?
41	to software	$ 100,000	?	?
42	to IPR&D	$ 300,000	?	?
43	to goodwill	$ 524,000	?	?
44
45	Suaro’s RE changes	Income	Dividends
46	2012	$ 75,000	$ 0
47	2013	$ 165,000	$ 35,000

Page 144

Project
Requirements

Complete
the four worksheets as follows:

1. Input
   the consolidated information worksheet provided and complete the
   fair-value allocation schedule by computing the excess amortizations for
   2012 and 2013.
2. Using
   separate worksheets, prepare Pecos’s trial balances for each of the
   indicated accounting methods (equity, initial value, and partial equity). Use
   only formulas for the Investment in Suaro, the Income of Suaro, and
   Retained Earnings accounts.
3. Using
   references to other cells only (either from the consolidated information
   worksheet or from the separate method sheets), prepare for each of the three consolidation worksheets:

• Adjustments
  and eliminations.
• Consolidated
  balances.
1. Calculate
   and present the effects of a 2013 total goodwill impairment loss on the
   following ratios for the consolidated entity:
• Earnings
  per share (EPS).
• Return
  on assets.
• Return
  on equity.
• Debt
  to equity.

Your worksheets should have the capability to adjust
immediately for the possibility that all acquisition goodwill can be considered
impaired in 2013.

1. Prepare
   a word-processed report that describes and discusses the following
   worksheet results:
1. The
   effects of alternative investment accounting methods on the parent’s
   trial balances and the final consolidation figures.
2. The
   relation between consolidated retained earnings and the parent’s retained
   earnings under each of the three (equity, initial value, partial equity)
   investment accounting methods.
3. The
   effect on EPS, return on assets, return on equity, and debt-to-equity
   ratios of the recognition that all acquisition-related goodwill is
   considered impaired in 2013.