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 (Microsoft Excel®, Lotus 123®, etc.). The use of these tools allows assessment of the sensitivity of alternative accounting methods on consolidated financial reporting without the necessity of preparing several similar worksheets by hand. Also, by modeling a worksheet process, a better understanding of accounting for combined reporting entities can result. 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, cost, 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: 1. Consolidated information worksheet (provided below). 2. Equity method consolidation worksheet. 3. Cost method consolidation worksheet. 4. Partial equity method consolidation worksheet. If your spreadsheet package has multiple worksheet capabilities (e.g., Excel), separate worksheets can be used; 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, 2002, when Suaro had the following balance sheet: Assets I-P Assets Cash $37,000 Receivables $82,000 Inventory $149,000 Land $90,000 Equipment (net) $225,000 Software $315,000 Total assets $898,000 Liability & Equity Liabilities ($422,000) Common stock ($350,000) Retained earnings ($126,000) Total liabity & equity ($898,000) rocess R&D 300,000 (no alternative use for these R&D assets) At the purchase date, the fair market values of each identifiable asset and liability that deferred from book value were as follows: Land $80,000 Brand name $60,000(indifinte-life unrecognized on Suaro's book) Software $415,000(2 year usefull life) In-process (R&D) $300,000(no alternative use for these (R&D assets) Additional Information • Pecos expects future benefits from the purchased in-process research and development (R&D) of Suaro. However, if the benefits are not realized, there is no alternative use for any of the purchased R&D assets. • During 2002, Suaro earns $75,000 and pays no dividends. • Selected amounts from Pecos and Suaro’s separate financial statements at December 31, 2003, are presented in the Consolidation Information Worksheet. All consolidated worksheets are to be prepared as of December 31, 2003, two years subsequent to acquisition. • Pecos’ January 1, 2003, Retained Earnings balance—before any effect from Suaro’s 2002 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. Following is the consolidation information worksheet. At the purchase date, the fair market values of each identifiable asset and liability that differed from book value were as follows: December 31, 2003 trial balances Pecos Suaro Revenues ($1,052,000) ($427,000) Operating Expenses $821,000 $262,000 Goodwill impairment loss ? Income to Suaro ? Net Income ? ($165,000) Retained earnings - Pecos 1/1/03 ? Retained earnings - Suaro 1/1/03 ($201,000) Net income (above) ? ($165,000) Dividends paid $200,000 $35,000 Retained earnings 12/31/03 ? ($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 Software $312,000 Other intangibles $145,000 Goodwill 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) Cost Allocation Schedule Price Paid $1,450,000 Book Value $476,000 Excess Cost $974,000 Amortizations to Land ($10,000) 2002 2003 to Brand Name $60,000 ? ? to Software $100,000 ? ? to IPR&D $300,000 ? ? to Goodwill $524,000 ? ? Suaro's RE Changes Income Dividends 2002 $75,000 $0 2003 $165,000 $35,000 Project Requirements Complete the four worksheets as follows: 1. Input the consolidated information worksheet provided and complete the cost allocation schedule by computing the excess amortizations for 2002 and 2003. 2. Using separate worksheets, prepare Pecos’ trial balances for each of the indicated accounting methods (equity, cost, 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 consolidation information worksheet or from the separate method sheets), prepare for each of the three consolidating worksheets: • Adjustments and eliminations • Consolidated balances 4. Calculate and present the effects of a 2003 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 2003. 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 relation between consolidated retained earnings and the parent’s retained earnings under each of the three (equity, cost, partial equity) investment accounting methods. c. 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 2003.
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