Investment Methods, Goodwill Impairment, and Consolidated Financial Statement by uc86


									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:

 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
 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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