On January 1, 2010, Hi-Speed.com acquired 100 percent of the common stock of Wi-Free Co. for cash of $730,000. The consideration transferred was allocated among Wi-Free's net assets as follows:
|
Wi-Free fair value (cash paid by Hi-Speed)
|
$730,000
|
|
Book value of Wi-Free:
|
|
Common stock and APIC
|
$130,000
|
|
Retained earnings
|
370,000
|
500,000
|
|
Excess fair value over book value to
|
$230,000
|
|
In-process R&D
|
75,000
|
|
Computer software (overvalued)
|
30,000
|
|
Internet domain name
|
120,000
|
165,000
|
|
Goodwill
|
$65,000
|
At the acquisition date, the computer software had a 4-year remaining life, and the Internet domain name was estimated to have a 10-year life. By the end of 2010, it became clear that the acquired inprocess research and development would yield no economic benefits and Hi-Speed.com recognized an impairment loss. At December 31, 2011, Wi-Free's accounts payable include a $30,000 amount owed to Hi-Speed. The December 31, 2011, trial balances for the parent and subsidiary follow:
|
Hi-Speed.com
|
Wi-Free Co.
|
|
Revenues
|
($1,100,000)
|
($325,000)
|
|
Cost of goods sold
|
625,000
|
122,000
|
|
Depreciation expense
|
140,000
|
12,000
|
|
Amortization expense
|
50,000
|
11,000
|
|
Equity in subsidiary earnings
|
175,500
|
-0-
|
|
Net income
|
($460,500)
|
($180,000)
|
|
Retained earnings 1/1/11
|
($1,552,500)
|
($450,000)
|
|
Net income
|
-460,500
|
-180,000
|
|
Dividends paid
|
250,000
|
50,000
|
|
Retained earnings 12/31/11
|
($1,763,000)
|
($580,000)
|
|
Current assets
|
$1,034,000
|
$345,000
|
|
Investment in Wi-Free
|
856,000
|
-0-
|
|
Equipment (net)
|
713,000
|
305,000
|
|
Computer software
|
650,000
|
130,000
|
|
Internet domain name
|
-0-
|
100,000
|
|
Goodwill
|
-0-
|
-0-
|
|
Total assets
|
$3,253,000
|
$880,000
|
|
Liabilities
|
($870,000)
|
($170,000)
|
|
Common stock
|
500,000
|
110,000
|
|
Additional paid-in capital
|
120,000
|
20,000
|
|
Retained earnings 12/31/11
|
1,763,000
|
580,000
|
|
Total liabilities and equity
|
($3,253,000)
|
($880,000)
|
Required
a. Using Excel, prepare calculations showing how Hi-Speed derived the $856,000 amount for its investment in Wi-Free.
b. Using Excel, compute consolidated balances for Hi-Speed and Wi-Free. Either use a worksheet approach or compute the balances directly.