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PECOS COMPANY AND SUARO COMPANY

PECOS COMPANY AND SUARO COMPANY

Question
Computer Project
PECOS COMPANY AND SUARO COMPANY
Consolidated Information Worksheet

Pecos Suaro
Revenues -1,052,000 -427,000
Operating expenses 821,000 262,000
Goodwill impa
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PECOS COMPANY AND SUARO COMPANY

Question
Computer Project
PECOS COMPANY AND SUARO COMPANY
Consolidated Information Worksheet

Pecos Suaro
Revenues -1,052,000 -427,000
Operating expenses 821,000 262,000
Goodwill impairment loss ?
Income of Suaro ?
Net income ? -165,000

Retained earnings—Pecos, 1/1 ?


Retained earnings—Suaro, 1/1 -201,000
Net income (above) ? -165,000
Dividends paid 200,000 35,000
Retained earnings, 12/31 ? -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 145000
Goodwill
Total assets ? 932,000

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Liabilities -1,537,100 -251,000
Common stock -500,000 -350,000
Retained earnings (above) ? -331,000
Total liabilities and equity ? -932,000

Fair Value Allocation Schedule


Acquisition-date fair value 1,450,000
Book value 476,000
Excess fair value over book value 974,000

Amortizations and Write-off


2009 2010
Land -10,000 ? ?
Brand Name 60,000 ? ?
Software 100,000 ? ?
IPR&D 300,000 ? ?
Goodwill 524,000

Suaro's Retained Earnings Changes


2009 2010
Income 75,000 165,000
Dividends 0 35,000
Please scroll straight across
In this project, you are to provide an analysis of alternative accounting methods for controlling
interest investment and subsequent effect on consolidated reporting. The project require the
use of a computer and a spreadsheet software package ( e.g Microsoft, excel, ect) the use of
these tools allows you to access the sensitivity of alternative accounting methods on
consolidates financial reporting without preparing several similar worksheets by hand. Also, by
modeling a worksheet process, you can develop a better understanding of accounting for
combined reporting entries.

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 this
investment ( equity, initial value and partial equity) on the parent company's trial balance and on
the consolidated worksheet the parent company's s trial balance and on the consolidated
work sheet subsequent to acquisition. The second objective is to show the effect on the
consolidated balances an key financial ratios of recognizing the goodwill impairment loss.

The project requires preparation of the following four separate worksheets:


(a) consolidated information worksheet (follows).
(b) equity method consolidation worksheet.
© Initial value method consolidated worksheet.
(D) Partial equity method consolidation worksheet.
If your spreadsheet package has mutiple worksheet capabilities (e.g, Excel), you can use
separate worksheets; 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
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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, 2009, when Suaro had the following balance sheet:

Assets Liabilities and Equity


Cash……………………….….$37,000 Liabilities………………….…………$(422,000)
Receivables…….…….…….82,000
Inventory…………..….....149,000 Common stock……………….…….(350,000)
Land………………………...….90,000 Retained earnings………...…….(126,000)
Equipment (net)……….225,000
Software……………….....315,000 _________
Total assets……….…….$898,000 Total liabilities and equity….$(898,000)

At the acquisition date, the fair values of each identifiable asset and liability that differed from
book value were as follows:

Land $80,000
Brand name 60,000 (indefinite life?unrecognized on Suaro's books)
Software 415,000 (2-year estimated useful life)
In-Process R&D 300,000 (no alternative use for these R&D assets)

Additional Information
? Although at acquisition date Pecos expected future benefits from Suaro's in-process research
and development (R&D), by the end of 2009, it became clear that the research project was a
failure with no future economic benefits.
? During 2009, Suaro earns $75,000 and pays no dividends.
? Selected amounts from Pecos and Suaro's separate financial statements at December 31,
2010, are presented in the consolidated information worksheet. All consolidated worksheets are
to be prepared as of December 31, 2010, two years subsequent to acquisition.
? Pecos's January 1, 2010, Retained Earnings balance balance?before any effect from Suaro's
2009 income?is ($930,000) (credit balance).
? Pecos's has 500,000 common shares outstanding for EPS calculations and reported
$2,943,100 for consolidated assets at the beginning of the period.

Project Requirements
Complete the four worksheets as follows:
1. Input the consolidated information worksheet provided and complete the fair value allocation
schedule by computing the excess amortizations for 2009 and 2010.
2. Using separate worksheets, prepare Pecos's trial balances for each of the indicated
accounting methods (equity, initial value, 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 consolidated information worksheet or
from the separate method sheets), prepare for each of the three consolidation worksheets:
? Adjustments and eliminations.
? Consolidated balances.
4. Calculate and present the effects of a 2010 total goodwill impairment loss on the following
ratios for the consolidated entity:
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? 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 2010.
5. 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 relations between consolidated retained earnings and the parent's retained earnings
under each of the three (equity, initial value, partial equity) investment accounting methods.
c. The effects 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 2010.

PECOS COMPANY AND SUARO COMPANY

Attachments
PECOS_COMPANY_AND_SUARO_COMPANY_.doc (38 KB)

Preview: the xxxxxx company xx lowered Dividends xxxxxxxx from the xxxxxx company xxx
xxxxxxxxxx as xxxxxxx of the xxxxxxxxxx account and xx added xxxxx xxxx and xxxxxxx the
investment xxxxxxx of the xxxxxxx Under xxxxxxx xxxxxx method, xxx parents investment
xxxxxxx is adjusted xxx parents xxxxx xx subsidiarys xxxxxxxx net income xxx net loss) xxx the
xxxxxxxxx xxxxx are xxxxxxxx by the xxxxxxxxxx whereas under xxx initial xxxxx xxxxxxx the
xxxxxxx investment includes xxxx the cost xx acquiring xxx xxxxxxxxxx Any xxxxx adjustments
to xxxxxxx equity method xxxxxxxxxxx are

pepco.xls (55.5 KB)

Preview not available.

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