On 1/1/Y1, Hazel paid $2,400,000 cash to acquire 80% of voting common stock while Henrys book value
Question:
On 1/1/Y1, Hazel paid $2,400,000 cash to acquire 80% of voting common stock while Henry’s book value was $1,850,000 and fair market value (FMV) was $3,000,000. Henry has neither issued nor reacquired any of its own treasury stock since 1/1/Y1. All of Henry’s book value of assets and liabilities were the same as the FMV on 1/1/Y1, except for the patent account, which was undervalued by $700,000 with a five-year remaining life. Separate financial statements for these two companies as of 12/31/Y3 are:
Hazel Henry
Revenues $(3,480,000) $(1,900,000)
Cost of goods sold 1,640,000 1,000,000
Depreciation expense 208,000 170,000
Amortization expense 440,000 240,000
Interest expense 40,000 30,000
Equity in earnings of Henry (248,000) –0–
Net income $(1,400,000) $(460,000)
Retained earnings, 1/1/Y3 $(5,600,000) $(690,000)
Net income (1,400,000) (460,000)
Dividends declared 400,000 50,000
Retained earnings, 12/31/Y3 $(6,600,000) $(1,100,000)
Cash $1,070,000 $230,000
Accounts receivable 1,150,000 430,000
Inventory 1,980,000 1,600,000
Investment in Henry 2,840,000 –0–
Buildings and equipment 2,050,000 1,726,000
Patents 1,900,000 214,000
Total assets $10,990,000 $4,200,000
Accounts payable $(900,000) $(400,000)
Notes payable (1,090,000) (900,000)
Common stock (1,800,000) (1,600,000)
Additional paid-in capital (600,000) (200,000)
Retained earnings, 12/31/Y3 (6,600,000) (1,100,000)
Total liabilities and stockholders’ equity $(10,990,000) $(4,200,000)
Henry regularly sells inventory to Hazel as records show below:
Year Intra-Entity Sales Ending Inventory at Transfer Price
Y1 $250,000 $160,000
Y2 440,000 250,000
Y3 600,000 320,000
The gross profit percentage for the intra-entity transfers is set as 25%, 28%, and 25% for the three years.
No goodwill impairments from this acquisition have occurred. Hazel loaned $35,000 to Henry for a three-year term on 1/1/Y3.
Calculate
a. goodwill allocation between HAZEL and NCI,
b. ending investment balances of HAZEL’s investment in HENRY and NCI’s investment in HENRY,
c. the amount of annual excess amortization and the ending net amount for equipment,
d. the allocation of HENRY’s net income to HAZEL and NCI,
e. the allocation of dividends declared by HENRY to HAZEL and NCI
South-Western Federal Taxation 2019 Essentials of Taxation Individuals and Business Entities
ISBN: 9781337702966
22nd edition
Authors: William A. Raabe, James C. Young, Annette Nellen, David M. Maloney