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| On January 1, 2014, Picante Corporation acquired 100 percent of the outstanding voting stock of Salsa Corporation for $2,023,000 cash. On the acquisition date, Salsa had the following balance sheet: |
| Cash | $ | 225,000 | Accounts payable | $ | 176,000 | |
| Accounts receivable | 110,000 | Long-term debt | 974,000 | |||
| Land | 705,000 | Common stock | 1,085,000 | |||
| Equipment (net) | 1,937,000 | Retained earnings | 742,000 | |||
| $ | 2,977,000 | $ | 2,977,000 | |||
| At the acquisition date, the following allocation was prepared: |
| Fair value of consideration transferred | $ | 2,023,000 | ||
| Book value acquired | 1,827,000 | |||
| Excess fair value over book value | 196,000 | |||
| To in-process research and development | $ | 46,250 | ||
| To equipment (8-year remaining life) | 133,600 | 179,850 | ||
| To goodwill (indefinite life) | $ | 16,150 | ||
| Although at acquisition date Picante had expected $46,250 in future benefits from Salsa’s in-process research and development project, by the end of 2014, it was apparent that the research project was a failure with no future economic benefits. |
| On December 31, 2015, Picante and Salsa submitted the following trial balances for consolidation. There were no intra-entity payables on that date. |
| Picante | Salsa | |||||
| Sales | $ | (3,615,450 | ) | $ | (1,133,000 | ) |
| Cost of goods sold | 1,647,500 | 667,500 | ||||
| Depreciation expense | 553,250 | 183,500 | ||||
| Subsidiary income | (265,300 | ) | 0 | |||
| Net income | $ | ( 1,680,000 | ) | $ | (282,000 | ) |
| Retained earnings 1/1/15 | $ | (3,240,000 | ) | $ | (948,000 | ) |
| Net income | (1,680,000 | ) | (282,000 | ) | ||
| Dividends declared | 300,000 | 27,125 | ||||
| Retained earnings 12/31/15 | $ | (4,620,000 | ) | $ | (1,202,875 | ) |
| Cash | $ | 14,775 | $ | 91,875 | ||
| Accounts receivable | 932,000 | 175,000 | ||||
| Inventory | 926,000 | 621,000 | ||||
| Investment in Salsa | 2,404,225 | 0 | ||||
| Land | 3,432,500 | 722,000 | ||||
| Equipment (net) | 5,132,500 | 1,935,000 | ||||
| Goodwill | 335,000 | 0 | ||||
| Total assets | $ | 13,177,000 | $ | 3,544,875 | ||
| Accounts payable | $ | (242,000 | ) | $ | (409,000 | ) |
| Long-term debt | (3,165,000 | ) | (848,000 | ) | ||
| Common stock | (5,150,000 | ) | (1,085,000 | ) | ||
| Retained earnings 12/31/15 | (4,620,000 | ) | (1,202,875 | ) | ||
| Total liabilities and equities | $ | (13,177,000 | ) | $ | (3,544,875 | ) |
Note: Parentheses indicate a credit balance.
| a. | Determine the investment in Salsa account balance as on December 31, 2015. (Amounts to be deducted should be indicated by a minus sign.) |
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| c. | Prepare a consolidated worksheet for Picante and Salsa as of December 31, 2015. (For accounts where multiple consolidation entries are required, combine all debit entries into one amount and enter this amount in the debit column of the worksheet. Similarly, combine all credit entries into one amount and enter this amount in the credit column of the worksheet.) |
Expert Answer
Solution:
b.
| Picante | Salsa | Adjustments | Consolidated | ||||||
| Sales | $ | -3615450 | -1133000 | -4748450 | |||||
| Cost of goods sold | 1,647,500 | 667,500 | 2,315,000 | ||||||
| Depreciation expense | 553,250 | 183,500 | [E] | 16,700 | 753,450 | ||||
| Subsidiary income | -265,300 | 0 | [I] | 265,300 | – | ||||
| Net income | $ | -1,680,000 | -282,000 | [S] | -1,680,000 | ||||
| Retained earnings 1/1/15 | $ | -3,240,000 | -948,000 | 948,000 | -3,240,000 | ||||
| Net income | -1,680,000 | -282,000 | -1,680,000 | ||||||
| Dividends declared | 300,000 | 27,125 | 27,125 | [D] | 300,000 | ||||
| Retained earnings 12/31/15 | $ | -4,620,000 | -1,202,875 | -4,620,000 | |||||
| Cash | $ | 14,775 | 91,875 | 106,650 | |||||
| Accounts receivable | 932,000 | 175,000 | 1,107,000 | ||||||
| Inventory | 926,000 | 621,000 | 1,547,000 | ||||||
| Investment in Salsa | 2,404,225 | 0 | [D] | 27,125 | [S] | 2,087,250 | |||
| [A] | 133,050 | ||||||||
| [I] | 265,300 | ||||||||
| Land | 3,432,500 | 722,000 | 4,154,500 | ||||||
| Equipment (net) | 5,132,500 | 1,935,000 | [A] | 116,900 | [E] | 16,700 | 7,167,700 | ||
| Goodwill | 335,000 | 0 | [A] | 16,150 | 351,150 | ||||
| Total assets | $ | 13,177,000 | 3,544,875 | 14,434,000 | |||||
| Accounts payable | $ | -242,000 | -409,000 | ) | -651,000 | ||||
| Long-term debt | -3,165,000 | -848000 | ) | -4,013,000 | |||||
| Common stock – Picante | 5,150,000 | -5,150,000 | |||||||
| Common stock – Salsa | -1,085,000 | [S] | 1,085,000 | ) | – | ||||
| Retained earnings 12/31/15 | -4,620,000 | -1,202,875 | ) | -4,620,000 | |||||
| Total liabilities and equities | $ | -13,177,000 | -3,544,875 | 2502300 | 2502300 | -14,434,000 |
