Fast Cool Company and HD Air Company are both manufacturers of air conditioning equipment. On January 1, 20X1, Fast Cool acquired the common stock of HD Air by exchanging its own $1 par, $20 fair value common stock. On the date of acquisition, HD Air had the following balance sheet:
|
HD Air Company |
|||
|
Assets |
Liabilities and Equity |
||
|
Accounts receivable |
$40,000 |
Current liabilities |
$30,000 |
|
Inventory |
60,000 |
Mortgage payable |
200,000 |
|
Land |
50,000 |
Common stock |
100,000 |
|
Buildings |
400,000 |
Paid in capital in excess of par |
200,000 |
|
Accumulated depreciation |
50,000 |
Retained earnings |
180,000 |
|
Equipment |
150,000 |
||
|
Accumulated depreciation |
30,000 |
||
|
Patent (net) |
40,000 |
||
|
Goodwill |
50,000 |
||
|
Total assets |
$710,000 |
Total liabilities and equity |
$710,000 |
Fast Cool requested that an appraisal be done to determine whether the book value of HD Air’s net assets reflected their fair values. The appraiser determined that several intangible assets existed, although they were unrecorded. If the intangible assets did not have an observable market, the appraiser estimated their value. The following are the fair values and estimates determined by the appraiser:
|
Inventory (sold during 20X1) |
$65,000 |
|
Land |
100,000 |
|
Buildings (20 year life) |
500,000 |
|
Equipment (5 year life) |
100,000 |
|
Patent (5 year life) |
50,000 |
|
Mortgage payable (5 year life) |
205,000 |
|
Production backlog (2 year life) |
10,000 |
Any remaining excess is attributed to goodwill.
100%, complicated excess, first year. Refer to the preceding information for Fast Cool’s acquisition of HD Air’s common stock. Assume Fast Cool issued 40,000 shares of its $20 fair value common stock for 100% of HD Air’s common stock. Fast Cool uses the simple equity method to account for its investment in HD Air. Fast Cool and HD Air had the following trial balances on December 31, 20X1:
|
Fast Cool |
HD Air |
|
|
Cash |
147,000 |
37,000 |
|
Accounts Receivable |
70,000 |
100,000 |
|
Inventory |
150,000 |
60,000 |
|
Land |
60,000 |
50,000 |
|
Investment in HD Air |
837,500 |
|
|
Buildings |
1,200,000 |
400,000 |
|
Accumulated Depreciation |
176,000 |
67,500 |
|
Equipment |
140,000 |
150,000 |
|
Accumulated Depreciation |
68,000 |
54,000 |
|
Patent (net) |
32,000 |
|
|
Goodwill |
50,000 |
|
|
Current Liabilities |
80,000 |
40,000 |
|
Mortgage Payable |
200,000 |
|
|
Common Stock |
100,000 |
100,000 |
|
Paid In Capital in Excess of Par |
1,500,000 |
200,000 |
|
Retained Earnings, Jan 1, 20X1 |
400,000 |
180,000 |
|
Sales |
700,000 |
400,000 |
|
Cost of Goods Sold |
380,000 |
210,000 |
|
Depreciation Expense—Buildings |
10,000 |
17,500 |
|
Depreciation Expense—Equipment |
7,000 |
24,000 |
|
Other Expenses |
50,000 |
85,000 |
|
Interest Expense |
16,000 |
|
|
Subsidiary Income |
47,500 |
|
|
Dividends Declared |
20,000 |
10,000 |
|
Totals |
0 |
0 |
Required
1. Prepare a zone analysis and a determination and distribution of excess schedule for the investment in HD Air.
2. Complete a consolidated worksheet for Fast Cool Company and its subsidiary HD Air Company as of December 31, 20X1. Prepare supporting amortization and income distribution schedules.