5/31/2021 Negative GW

1. Award: 10.00 points Problems? Adjust credit for all students.

The balance sheets of E Ltd. and J Ltd. on December 30, Year 6, were as follows:

E Ltd. J Ltd.
Cash and receivables $ 96,000 $ 19,500
Inventory 57,000 9,000
Plant assets (net) 228,000 70,500
Intangible assets 24,000 6,000
$ 405,000 $ 105,000
Current liabilities $ 63,000 $ 30,000
Long-term debt 97,500 45,000
Common shares 153,000 46,500
Retained earnings (deficit) 91,500 (16,500)
$ 405,000 $ 105,000

On December 31, Year 6, E Ltd. issued 490 shares, with a fair value of $40 each, for 70% of the outstanding shares of J Ltd. Costs involved in the
acquisition, paid in cash, were as follows:

Costs of arranging the acquisition $ 2,500

Costs of issuing shares 1,600
$ 4,100

The carrying amounts of J Ltd.’s net assets were equal to fair values on this date except for the following:

Fair value
Plant assets $ 65,000
Long-term debt 40,000

E Ltd. was identified as the acquirer in the combination.

Required:
(a) Prepare the consolidated balance sheet of E Ltd. on December 31, Year 6, under the identifiable net assets method.

E Ltd.
Consolidated Balance Sheet
December 31, Year 6
Assets
Cash and receivables $ 111,400
Inventory 66,000
Plant assets 293,000
Intangible assets 30,000

F
$ 500,400
Liabilities and Equity
Current liabilities $ 93,000
Long-term debt 137,500
Common shares 171,000
Retained earnings 90,050
Non-controlling interest 8,850

F
$ 500,400

(b) Prepare the consolidated balance sheet of E Ltd. on December 31, Year 6, under the fair value enterprise method.

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5/31/2021 Negative GW

E Ltd.
Consolidated Balance Sheet
December 31, Year 6
Assets
Cash and receivables $ 111,400
Inventory 66,000
Plant assets 293,000
Intangible assets 30,000

F
$ 500,400
Liabilities and Equity
Current liabilities $ 93,000
Long-term debt 137,500
Common shares 171,000
Retained earnings 90,500
Non-controlling interest 8,400

F
$ 500,400

Explanation:

(a)
Identifiable net assets method

Cost of 70% investment (490 shares × $40) $ 19,600

Implied value of 100% investment $ 28,000
Carrying amount of J's net assets
Assets 105,000
Liabilities (75,000)
$ 30,000 (a)
Acquisition differential $ (2,000)
Allocated: FV – CA
Plant assets $ (5,500) (b)
Long-term debt 5,000 $ (500) (c)
Negative goodwill $ (1,500)
Less: Non-controlling interest’s share not recognized (30%) 450 (d)
Negative goodwill recognized on consolidation $ (1,050)
Recognized in income 1,050 (e)
Goodwill $ 0
Non-controlling interest [((a) 30,000 – (b) 5,500 + (c) 5,000) × 30%] $ 8,850

Cash and receivables ($96,000 − $4,100 + $19,500) = $111,400

Inventory ($57,000 + $9,000) = $66,000
Plant assets ($228,000 + $70,500 – $5,500) = $293,000
Intangible assets ($24,000 + $6,000) = $30,000

Current liabilities ($63,000 + $30,000) = $93,000

Long-term debt ($97,500 + $45,000 – $5,000) = $137,500
Common shares ($153,000 + $19,600 – $1,600) = $171,000
Retained earnings ($91,500 + $1,050 – $2,500) = $90,050

(b)
Fair value enterprise method

Cost of 70% investment (490 shares × $40) $ 19,600

Implied value of 100% investment $ 28,000 (f)
Carrying amount of J's net assets
Assets $ 105,000
Liabilities (75,000)
$ 30,000
Acquisition differential $ (2,000)
Allocated: FV – CA
Plant assets $ (5,500)
Long-term debt 5,000 $ (500)
Negative goodwill in total (1,500)
Recognized in parent's income 1,500

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5/31/2021 Negative GW
Goodwill $ 0
Non-controlling interest [(f) 28,000 × 30%] $ 8,400

Cash and receivables ($96,000 – $4,100 + $19,500) = $111,400

Inventory ($57,000 + $9,000) = $66,000
Plant assets ($228,000 + $70,500 – $5,500) = $293,000
Intangible assets ($24,000 + $6,000) = $30,000

Current liabilities ($63,000 + $30,000) = $93,000

Long-term debt ($97,500 + $45,000 – $5,000) = $137,500
Common shares ($153,000 + $19,600 – $1,600) = $171,000
Retained earnings ($91,500 + $1,500 – $2,500) = $90,500

References

Worksheet Learning Objective: 04-03

Prepare a consolidated balance
sheet using the identifiable net
assets method.

Learning Objective: 04- Learning Objective: 04-04

02 Prepare a Explain the concept of negative
consolidated balance goodwill and describe how it
sheet using the fair should be treated when it arises
value enterprise in a business combination.
method.

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