On January 1, 2006, John Doe Enterprises (JDE) bought a 55% interest in Bubba Manufacturing, Inc. (BMI). JDE paid for the transaction with $3.5 million cash and 400,000 shares of JDE common stock (par value $1.00 per share). At the time of the acquisition, BMI's book value was $16,970,000.
On January 1, JDE stock had a market value of $17.25 per share. Any cost over book value is assigned to goodwill, which is not amortized. BMI had the following balances on January 1, 2006.
For internal reporting purposes, JDE employed the equity method to account for this investment.
BOOK MARKET
VALUE VALUE
Land 1,700,000 2,550,000
Buildings (seven-year remaining life) 2,700,000 3,400,000
Equipment (five-year remaining life) 3,700,000 3,300,000
The following account balances are for the year ending December 31, 2006 for both companies.
PART B
John Doe Bubba ELIMINATIONS CONSOLIDATED
Enterprises Manufacturing RE DEBITS RE CREDITS NC INTEREST TOTALS
Revenues (298,000,000) (103,750,000)
Expenses 271,000,000 95,800,000
Equity in income of Bubba Manufacturing (4,361,500) -
Non controlling interest in income
Net income (31,361,500) (7,950,000)
Retained earnings, January 1, 2006 (2,450,000) (100,000)
Net income (above) (31,361,500) (7,950,000)
Dividends paid 5,000,000 3,000,000
Retained earnings, December 31, 2006 (28,811,500) (5,050,000)
Current Assets 30,500,000 20,800,000
Investment in Bubba Manufacturing 13,111,500
Land 1,500,000 1,700,000
Buildings 5,600,000 2,360,000
Equipment (net) 3,100,000 2,960,000
Goodwill
Total assets 53,811,500 27,820,000
Accounts payable (3,100,000) (4,900,000)
Notes payable (1,000,000)
Non controlling interest
Common stock (2,900,000) (6,000,000)
Additional paid-in capital (19,000,000) (10,870,000)
Retained earnings, Dec. 31, 2006 (above) (28,811,500) (5,050,000)
Total liabilities and stockholders' equity (53,811,500) (27,820,000)
REQUIRED:
A. Prepare a schedule to determine the amortization and allocation amounts.
B. Prepare a consolidation worksheet for this business combination. Assume goodwill has been reviewed and there is no goodwill impairment. Show the eliminations on the worksheet above. Insert any additional accounts on the worksheet that are needed.
C. As of the acquisition date what value would be assigned to the land, buildings, equipment, goodwill and non-controlling interest under the Economic and Proportionate Consolidation Concepts?