Frodo Ltd. acquired 40% of Ring Inc. common shares on January 1^st, 2018. Frodo paid to Ring's common shareholders $800,000 in cash and issued them new 20,000 Frodo's common shares with $2 par value and $12 market value. 

 In addition, Frodo promised to pay $69,000 to Ring's shareholders in one year if Ring meets an agreed sales target. The applicable annual discount rate is 15% and it is very likely that Ring will meet the agreed sales target. 

 Frodo paid $70,000 in cash on the acquisition date for consulting fees related to the acquisition and $10,000 for expenses directly related to issuing new shares. At the date of acquisition, Frodo's differences between book values and fair values were as follows:

	BV	FV	FV - BV	Notes
Land	50,000	100,000	50,000	Acquired last year
Current assets	15,000	10,000	(5,000)	1 year life

 

At the date of acquisition, the due diligence team determined the following differences between book values and fair values for Ring:

	BV	FV	FV - BV	Notes
PPE	50,000	60,000	10,000	10 years remaining life

 

In addition, Ring has:

 An unrecorded liability for environmental clean-up costs with an estimated value of $700,000. These costs will be incurred over the next 10 years since the acquisition date.

 An unrecorded patent with an estimated value of $150,000 and a useful life of 5 years since the acquisition date.

At the date of acquisition, Ring's book value of equity was as follows:

 

	Ring Jan 1st, 2018
Common Stock, $1 par	3,300
Other Paid-in Capital	200,000
Retained Earnings	45,000
Total Equity	248,300

 

Frodo's fiscal year-end is December 31^st. Frodo's net income for the fiscal year January-December 2018 and 2019was $20,000 and $25,000, respectively.  Frodo declared dividends to common shareholders on December 30^th, 2018, and 2019 for $10,000 and $12,000, respectively.

 Ring's fiscal year-end is December 31^st. Ring's net income for the fiscal years January-December 2018 and 2019was $500,000 and $600,000, respectively. Ring declared dividends to common shareholders on December 30^th, 2018, and 2019 for $50,000 and $50,000, respectively.

 

For Frodo's acquisition of Ring, required:

 Prepare schedule showing the determination and allocation of ECOBV and goodwill.

Prepare schedule showing the amortization of allocated ECOVB for 2018 and 2019.

Prepare Frodo's entries for 2018 and 2019 related to the transactions in the problem

Provide the balance for the investments account and investment income in Frodo's financial statements at the end of 2018 and 2019.

Michael acquired 60% of Aaron's outstanding voting stock on January 1, 2011, by issuing 20,000 shares of its own $1 par common stock, actively traded at $24.00 per share. On the date of acquisition, Aaron had Retained Earnings of $230,000 and a common stock balance of $130,000. Also, royalty agreements on Aaron's balance sheet (included in the Intangible Assets account) were undervalued by $60,000. The royalty agreements had a six-year life with no residual value. In addition, Aaron had a non-recorded trademark with a fair value of $50,000 and a 10-year remaining life. The total net income reported by Aaron in the years 2011 to 2014 was $190,000. Aaron did not pay dividends in the years 2011 to 2014. On Dec 30, 2015, Aaron paid dividends of $20,000. Below are separate financial statements of Michael Company and Aaron Company as of December 31, 2015. Michael uses the equity method to account for its investment in Aaron.

B/S Dec 31, 2015	Michael B/S	Aaron B/S
Cash	126,000	70,000
Inventory	75,000	70,000
PPE	250,000	480,000
Investment in Aaron	561,000
Goodwill
Intangible assets		50,000
Total Assets	1,012,000	670,000
LT liabilities	250,000	100,000
Common stock	500,000	130,000
NCI
R/E	262,000	440,000
Total L + Equity	1,012,000	670,000

 

I/S for 2015
Sales	50,000	100,000
Investment Income	15,000
	65,000	100,000
COGS	26,500	40,000
Expenses	5,200	20,000
	31,700	60,000
Net income	33,300	40,000

 

Required:

1. Schedule showing the calculation of ECOBV and goodwill on the acquisition date
2. Schedule showing the amortization of ECOBV from 2011-2015
3. Schedule showing the calculation of NCI in the balance sheet from 2011-2015
4. Consolidated income statement for 2015 using the worksheet in the booklet
5. Consolidated balance sheet as of Dec 31, 2015 using the worksheet in the booklet

Answer rating: 100% (QA)

Frodo Ltds Acquisition of Ring Inc Schedule showing the determination and allocation of ECOBV and Goodwill 1 Fair Value Adjustments Category Book Value BV Fair Value FV FV BV Notes Land 50000 100000 5... View the full answer