PECOS COMPANY AND SUARO COMPANY
Consolidated Information Worksheet
Revenues -1,052,000 -427,000
Operating expenses 821,000 262,000
Goodwill impairment loss ?
Income of Suaro ?
Net income ? -165,000
Retained earningsâ€”Pecos, 1/1 ?
Retained earningsâ€”Suaro, 1/1 -201,000
Net income (above) ? -165,000
Dividends paid 200,000 35,000
Retained earnings, 12/31 ? -331,000
Cash 195,000 95,000
Receivables 247,000 143,000
Inventory 415,000 197,000
Investment in Suaro ?
Land 341,000 85,000
Equipment (net) 240,100 100,000
Other intangibles 145000
Total assets ? 932,000
Liabilities -1,537,100 -251,000
Common stock -500,000 -350,000
Retained earnings (above) ? -331,000
Total liabilities and equity ? -932,000
Fair Value Allocation Schedule
Acquisition-date fair value 1,450,000
Book value 476,000
Excess fair value over book value 974,000
Amortizations and Write-off
Land -10,000 ? ?
Brand Name 60,000 ? ?
Software 100,000 ? ?
IPR&D 300,000 ? ?
Suaro’s Retained Earnings Changes
Income 75,000 165,000
Dividends 0 35,000
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In this project, you are to provide an analysis of alternative accounting methods for controlling interest investment and subsequent effect on consolidated reporting. The project require the use of a computer and a spreadsheet software package ( e.g Microsoft, excel, ect) the use of these tools allows you to access the sensitivity of alternative accounting methods on consolidates 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 entries.
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 this investment ( equity, initial value and partial equity) on the parent company’s trial balance and on the consolidated worksheet the parent company’s s trial balance and on the consolidated
work sheet subsequent to acquisition. The second objective is to show the effect on the consolidated balances an key financial ratios of recognizing the goodwill impairment loss.
The project requires preparation of the following four separate worksheets:
(a) consolidated information worksheet (follows).
(b) equity method consolidation worksheet.
Â© Initial value method consolidated worksheet.
(D) Partial equity method consolidation worksheet.
If your spreadsheet package has mutiple 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.
Pecos Company acquired 100 percent of Suaro’s outstanding stock for $1,450,000 cash on January 1, 2009, when Suaro had the following balance sheet:
Assets Liabilities and Equity
Inventoryâ€¦â€¦â€¦â€¦..â€¦…..149,000 Common stockâ€¦â€¦â€¦â€¦â€¦â€¦.â€¦â€¦.(350,000)
Landâ€¦â€¦â€¦â€¦â€¦â€¦â€¦â€¦â€¦…â€¦.90,000 Retained earningsâ€¦â€¦â€¦…â€¦â€¦.(126,000)
Total assetsâ€¦â€¦â€¦.â€¦â€¦.$898,000 Total liabilities and equityâ€¦.$(898,000)
At the acquisition date, the fair values of each identifiable asset and liability that differed from book value were as follows:
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 (no alternative use for these R&D assets)
? Although at acquisition date Pecos expected future benefits from Suaro’s in-process research and development (R&D), by the end of 2009, it became clear that the research project was a failure with no future economic benefits.
? During 2009, Suaro earns $75,000 and pays no dividends.
? Selected amounts from Pecos and Suaro’s separate financial statements at December 31, 2010, are presented in the consolidated information worksheet. All consolidated worksheets are to be prepared as of December 31, 2010, two years subsequent to acquisition.
? Pecos’s January 1, 2010, Retained Earnings balance balance?before any effect from Suaro’s 2009 income?is ($930,000) (credit balance).
? Pecos’s has 500,000 common shares outstanding for EPS calculations and reported $2,943,100 for consolidated assets at the beginning of the period.
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 2009 and 2010.
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.
4. Calculate and present the effects of a 2010 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 2010.
5. Prepare a word-processed report that describes and discusses the following worksheet results:
a. The effects of alternative investment accounting methods on the parent’s trial balances and the final consolidation figures.
b. The relations between consolidated retained earnings and the parent’s retained earnings under each of the three (equity, initial value, partial equity) investment accounting methods.
c. The effects 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 2010.