Description
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:
- Consolidated
information worksheet (follows). - Equity
method consolidation worksheet. - Initial
value method consolidation worksheet. - 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 |
$ |
Liabilities |
$(422,000) |
Receivables |
82,000 |
||
Inventory |
149,000 |
Common |
(350,000) |
Land |
90,000 |
Retained |
(126,000) |
Equipment |
225,000 |
||
Software |
315,000 |
||
Total |
$898,000 |
Total |
$(898,000) |
At
the acquisition date, the fair values of each identifiable asset and liability
that differed from book value were as follows:
Land |
$ |
|
Brand |
60,000 |
(indefinite |
Software |
415,000 |
(2-year |
In-process |
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 |
|||
2 |
||||
3 |
Pecos |
Suaro |
||
4 |
Revenues |
($1,052,000) |
($427,000) |
|
5 |
Operating |
$ |
$262,000 |
|
6 |
Goodwill |
? |
||
7 |
Income |
? |
||
8 |
Net |
? |
($165,000) |
|
9 |
||||
10 |
Retained |
? |
||
11 |
Retained |
($201,000) |
||
12 |
Net |
? |
($165,000) |
|
13 |
Dividends |
$ |
$ |
|
14 |
Retained |
? |
($331,000) |
|
15 |
||||
16 |
Cash |
$ |
$ |
|
17 |
Receivables |
$ |
$143,000 |
|
18 |
Inventory |
$ |
$197,000 |
|
19 |
Investment |
? |
||
20 |
||||
21 |
||||
22 |
||||
23 |
Land |
$ |
$ |
|
24 |
Equipment |
$ |
$100,000 |
|
25 |
Software |
$312,000 |
||
26 |
Other |
$ |
||
27 |
Goodwill |
|||
28 |
Total |
? |
$932,000 |
|
29 |
||||
30 |
Liabilities |
($1,537,100) |
($251,000) |
|
31 |
Common |
($ |
($350,000) |
|
32 |
Retained |
? |
($331,000) |
|
33 |
Total |
? |
($932,000) |
|
34 |
||||
35 |
Fair |
|||
36 |
Price |
$1,450,000 |
||
37 |
Book |
$ |
||
38 |
Excess |
$ |
Amortizations |
|
39 |
to land |
($ |
2012 |
2013 |
40 |
to brand |
$ |
? |
? |
41 |
to |
$ |
? |
? |
42 |
to |
$ |
? |
? |
43 |
to |
$ |
? |
? |
44 |
||||
45 |
Suaro’s |
Income |
Dividends |
|
46 |
2012 |
$ |
$ |
|
47 |
2013 |
$ |
$ |
Page 144
Project
Requirements
Complete
the four worksheets as follows:
- Input
the consolidated information worksheet provided and complete the
fair-value allocation schedule by computing the excess amortizations for
2012 and 2013. - 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. - 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.
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.
- Prepare
a word-processed report that describes and discusses the following
worksheet results:
- The
effects of alternative investment accounting methods on the parent’s
trial balances and the final consolidation figures. - 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. - 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.
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