Chapter 2, Problem 3 - UTORweb assets (24,000 + 6,000 – 592) 29,408 Dr 493,400 Dr Current liabilities (63,000 + 30,000) 93,000 Dr Long-term debt (97,500 + 45,000 - 5,000) 137,500

Chapter 2, Problem 3

(a) Available for sale Investment No journal entry is required.

(b) Significantly Influenced Investment Investment income 4,500 Investment in Small Inc. 4,500 Calculation: Cost to Big of items in inventory 115,000 Cost to Small 90,000 Unrealized before-tax profit 25,000 Income tax at 40% 10,000 Unrealized after-tax profit 15,000 Bigs’s ownership 30% Amount of hold back 4,500

Problem 4

Cost of 30% investment 1,500,000

Book value of Stergis 4,800,000 Blake’s ownership 30% 1,440,000

Purchase discrepancy 60,000 Allocated: FV - BV Buildings 84,000 x 30% 25,200 Dr

Balance - goodwill 34,800 Dr

Part A - Significant Influence

January 1, 2005 Investment in Stergis 1,500,000 Cash 1,500,000 To record purchase of 30% of Stergis.

December 31, 2005 Investment in Stergis 12,600 Investment Income 12,600 To record 30% of Stergis’s 2005 net income.

30% x 42,000 = 12,600 Cash 18,000 Investment in Stergis 18,000 To record 30% of Stergis’s 2005 dividends.

30% x 60,000 = 18,000 Investment income 2,520 Investment in Stergis 2,520 To record amortization of purchase discrepancy as follows: Building 25,200 / 10 years = 2,520

December 31, 2006

Investment in Stergis 36,000 Investment income 36,000 To record 30% of Stergis’s 2006 net income.

30% x 120,000 = 36,000 Cash 18,000 Investment in Stergis 18,000 To record 30% of Stergis’s 2006 dividends.

30% x 60,000 = 18,000 Investment income 2,520 Investment in Stergis 2,520 To record amortization of purchase discrepancy as in 2005.

Part B - No Significant Influence

January 1, 2005 Investment in Stergis 1,500,000 Cash 1,500,000 To record purchase of 30% of Stergis.

December 31, 2005 Cash 18,000 Dividend revenue

Investment in Stergis 12,600

5,400

To record 30% of Stergis’s 2005 dividends.

December 31, 2006

Cash 18,000 Investment in Stergis 18,000 To record 30% of Stergis’s 2006 dividends.

30% x 60,000 = 18,000

Problem 11 (a)

Cost of 35% of Summit 89,000

Book value of Summit 120,000

35% 42,000

Purchase discrepancy 47,000

Allocated FV – BV

Equipment 20,000 x 35% 7,000 Dr

Goodwill 40,000 Dr

(b) Equity method

Cost January 1, Year 1 89,000

Net incomes Years 1 – 3 45,000 x 35% 15,750

Dividends Years 1 – 3 50,000 x 35% (17,500)

Purchase discrepancy amortization

Equipment (7,000 / 7) × 3 years (3,000)

Investment account balance – end of Year 3 84,250

(b) Cost method

Cost January 1, Year 1 89,000

Dividends in excess of net incomes

Years 1 – 3 5,000 x 35% (1,750)

Investment account balance – end of Year 3 87,250


Proposal 1

Purchase price (300,000 + 5,000) 305,000

Fair value of net assets 296,770

Goodwill 8,230

(a)

Cash 300,000

Loan payable 300,000

Cash 52,500

Accounts receivable 56,200

Inventory 134,220

Land 210,000

Buildings 24,020

Equipment 15,945

Goodwill 8,230

Current liabilities (detail) 41,115

Noncurrent liabilities (detail) 155,000

Cash 305,000

Myers Company

Balance Sheet

Cash (140,000 + 300,000 – 305,000 + 52,500) 187,500

Accounts receivable (167,200 + 56,200) 223,400

Inventory (374,120 + 134,220) 508,340

Land (425,000 + 210,000) 635,000

Buildings (net) (250,505 + 24,020) 274,525

Equipment (net) (78,945 + 15,945) 94,890

Goodwill 8,230

1,931,885

Current liabilities (133,335 + 41,115) 174,450

Noncurrent liabilities (300,000 + 155,000) 455,000

Common stock 500,000

Retained earnings 802,435

1,931,885

Proposal 2 Myers is the acquirer because its shareholders hold 52,000 shares while Norris shareholders

will hold 50,000 shares.

Purchase price 50,000 @ $8 400,000

Legal fees 5,000

405,000

Fair value of net assets 296,770

Goodwill 108,230

(a) Cash (52,500 – 12,000) 40,500

Accounts receivable 56,200

Inventory 134,220

Land 210,000

Buildings 24,020

Equipment 15,945

Goodwill 108,230

Current liabilities 41,115

Noncurrent liabilities 155,000

Common stock (400,000 – 7,000) 393,000

(b) Myers Company

Balance Sheet

Cash (140,000 + 40,500 ) 180,500


Inventory (374,120 + 134,220) 508,340

Land (425,000 + 210,000) 635,000

Building (net) (250,505 + 24,020) 274,525

Equipment (net) (78,945 + 15,945) 94,890

Goodwill 108,230

2,024,885


Noncurrent liabilities 155,000

Common stock (500,000 + 400,000 – 7,000) 893,000


2,024,885


Cost of investment 32,000 Dr

Book value of Seeview Co.

Common stock 38,750 Dr

Retained earnings (13,750) Dr

25,000 Dr

90% Dr 22,500 Dr

Purchase discrepancy 9,500 Dr

Allocated: FV – BV

Inventory 1,250 × 90% 1,125 Dr

Plant assets 8,750 × 90% 7,875 Dr

Intangible assets 2,500 × 90% 2,250 Dr

11,250 Dr

Long-term debt -5,000 × 90% 4,500 Dr 15,750 Dr

Negative goodwill 6,250 Cr

Allocated:

Plant assets 67.5/75 × 6,250 5,625 Cr

Intangible assets 7.5/75 × 6,250 625 Cr 6,250 Cr

–0– Dr

Noncontrolling interest (10% × 25,000) 2,500 Dr

Petron Co.

Consolidated Balance Sheet

June 30, Year 2

Cash and receivables (80,000 – 32,000 + 16,250) 64,250

Inventory (47,500 + 7,500 + 1,125) 56,125

Plant assets (190,000 + 58,750 + 7,875 – 5,625) 251,000

Intangible assets (20,000 + 5,000 + 2,250 – 625) 26,625

398,000


Long-term debt (81,250 + 37,500 – 4,500) 114,250

Noncontrolling interest 2,500



398,000

Problem 6

Cost of investment (500 sh × $40) 20,000 Dr

Cost of arranging acquisition 2,500 Dr

Total acquisition cost 22,500 Dr

Book value of J

Common stock 46,500) Dr

Retained earnings (16,500) Dr 30,000 Dr

Purchase discrepancy 7,500 Cr


Plant assets – 5,500 × 100% 5,500 Cr)

Long-term debt + 5,000 × 100% 5,000 Dr) 500 Cr

Negative goodwill 7,000 Cr

Allocated:

Plant assets 65/71 × 7,000 Cr 6,408 Cr)

Intangible assets 6/71 × 7,000 Cr 592 Cr) 7,000 Cr

–0– Dr

E Ltd.


December 31, Year 6

Cash and receivables (96,000 – 4,100 + 19,500) 111,400 Dr

Inventory (57,000 + 9,000 ) 66,000 Dr

Plant assets (228,000 + 70,500 – 5,500 – 6,408) 286,592 Dr

Intangible assets (24,000 + 6,000 – 592) 29,408 Dr

493,400 Dr

Current liabilities (63,000 + 30,000) 93,000 Dr

Long-term debt (97,500 + 45,000 - 5,000) 137,500 Dr

Common stock (153,000 + 20,000 - 1,600) 171,400 Dr

Retained earnings 91,500 Dr

493,400 Dr

Problem 8

X Ltd. shareholders 100 sh 40%

Y Ltd. shareholders 150 sh 60%

Shares of X Ltd. 250 sh 100%

(a) Y is the acquirer, therefore this is a reverse takeover. One likely reason for this transaction

is that Y Ltd. wants a stock exchange listing and X Ltd., a dormant company, has such a

listing.

(b) If Y Ltd. acquired X Ltd. in a manner that the relative shareholdings were the same, it

would have to issue 40 shares so that:

Y Ltd. shareholders 60 sh 60%

X Ltd. shareholders 40 sh 40%

100 sh 100%

Acquisition cost is 40 sh @ $40 1,600

Book value of X Ltd. 1,100

Purchase discrepancy 500

Allocated: Fixed assets 200

Balance: goodwill 300

X Ltd.


December 31, Year 7

Current assets (300 + 1,000) 1,300

Fixed assets (1,500 + 200 + 2,700) 4,400

Goodwill 300

6,000

Current liabilities (400 + 900) 1,300

Long-term debt (300 + 800) 1,100

Common stock* (600 + 1,600) 2,200


6,000

* 250 shares issued


Cost of investment 2,500,000

Book value of Saint

Common stock 1,600,000


2,000,000

75% 1,500,000

Purchase discrepancy 1,000,000

Allocated:

Inventory (30%) 300,000

Equipment (40%) 400,000 700,000

Balance - goodwill (40%) 300,000

Amortization Schedule Balance Amortization Balance

July 1 Dec. 31 Dec. 31 Dec. 31 Dec. 31

Year 2 Year 2 Years 3, 4, and 5 Year 6 Year 6

Inventory 300,000 300,000

Equipment 400,000 25,000 150,000 50,000 175,000

Goodwill 300,000 70,000 20,000 210,000

1,000,000 325,000 220,000 70,000 385,000

Calculation of Saint’s Year 6 net income Noncontrolling interest per income statement 100,000

Saint’s net income 100,000 / 25% 400,000

Calculation of Saint’s retained earnings

Noncontrolling interest per balance sheet 650,000

Saint’s shareholders’ equity 650,000 / 25% 2,600,000

Less: Saint’s common shares 1,600,000

Saint’s retained earnings December 31, Year 6 1,000,000

Less: net income Year 6 400,000

600,000

Add: dividends Year 6 200,000

Saint’s retained earnings December 31, Year 5 800,000

Saint Company

Income Statement

For the Year Ended December 31, Year 6

Sales (5,000 – 4,000) 1,000,000

Cost of sales (2,900 – 2,500) 400,000

Miscellaneous expenses (390 – 320) 70,000

Depreciation expense (140 – 80 –50) 10,000

Income tax (370 – 250) 120,000

600,000

Net income 400,000

Saint Company

Retained Earnings Statement

For the Year Ended December 31, Year 6

Balance, January 1 800,000

Net income 400,000

1,200,000

Less: dividends 200,000

Balance December 31, Year 6 1,000,000

Saint Company

Balance Sheet December 31, Year 6 Cash (400 – 300) 100,000

Accounts receivable (125 – 200 + 75) –0–

Inventory (2,420 – 2,000) 420,000

Plant and equipment (6,090 – 3,000 – 400) 2,690,000

Accumulated depreciation (1,285 – 750 – 225) (310,000)

2,900,000

Liabilities (1,125 – 900 + 75) 300,000


Retained earnings 1,000,000

2,900,000

Problem 9

Cost of 80% of Drexel 310,000

Book value of Drexel - Common Stock 200,000


260,000

80% 208,000


Allocated Fv – Bv

Capital assets 40,000 x 80% 32,000

Customer lists 24,000 x 80% 19,200 51,200

Goodwill 50,800

Bal Amortization Loss Bal

Dec. 31/02 to Dec.31/05 2006 2006 Dec. 31/06 Capital assets 32,000 12,000 4,000 16,000

Customer lists 19.200 4,800 1,600 1,800 11,000

Goodwill 50,800 ----- ------ 10,800 40,000

102,000 16,800 5,600 12,600 67,000

Abbot Inc.

Consolidated Income statement

Year ended December 31, 2006

Sales (870,000 + 515,000) 1,385,000

Interest and investment income (14,000 + 2,000) 16,000

1,401,000

Cost of sales (638,000 + 360,000) 998,000

Impairment losses 12,600

Amortization expense (22,000 + 35,000 + 5,600) 62,600

Other expenses (144,000 + 72,000) 216,000

1,289,200

Net income – entity 111,800

Noncontrolling interest (20% x 50,000) 10,000

Net income 101,800

Abbot Inc.

Consolidated Retained Earnings Statement

Year Ended December 31, 2006

Balance January 1 81,200

Net income 101,800

183,000

Dividends 36,000

Balance December 31 147,000

Abbot Inc.


December 31, 2006 Cash (20,000 + 30,000) 50,000


Notes receivable 10,000

Inventory (100,000 + 180,000) 280,000

Capital assets (230,000 + 160,000 + 16,000) 406,000

Investments ( 82,000 + 22,000) 104,000

Customer lists 11,000

Goodwill 40,000

1,149,000

Accounts payable (80,000 + 62,000) 142,000

Other current liabilities (10,000 + 50,000) 60,000

Notes payable (130,000 + 100,000) 230,000



Retained earnings 147,000 647,000

1,149,000


Cost of 80% of Storm 310,000

Book value of Storm - Common Stock 200,000


260,000

80% 208,000


Allocated Fv – Bv

Capital assets 40,000 x 80% 32,000

Customer lists 24,000 x 80% 19,200 51,200

Goodwill 50,800

Bal Amortization Loss Bal

Dec. 31/02 to Dec.31/05 2006 2006 Dec. 31/06 Capital assets 32,000 12,000 4,000 16,000

Customer lists 19.200 4,800 1,600 1,800 11,000

Goodwill 50,800 ----- ------ 10,800 40,000

102,000 16,800 5,600 12,600 67,000

Calculation of consolidated net income Palm net income 96,000

Less: Purch. discrep. amort. (5.600 + 12.600) 18,200

Dividend income (80% x 20,000) 16,000 34,200

61,800

Storm net income 50,000

80% 40,000

101,800

Palm Inc.

Consolidated Income statement

Year ended December 31, 2006

Sales (870,000 + 515,000) 1,385,000

Interest income (30,000 – 16,000 + 2,000) 16,000

1,401,000

Cost of sales (638,000 + 360,000) 998,000

Impairment losses 12,600

Amortization expense (22,000 + 35,000 + 5,600) 62,600

Other expenses (144,000 + 72,000) 216,000

1,289,200



Net income 101,800

Calc. of consolidated retained earnings January 1, 2006

Palm retained earnings Jan, 1, 2006 50,000

Less Purch. discrepancy amortization to Jan. 1, 2006 16,800

33,200

Storm retained earnings Jan. 1, 2006 120,000

Acquisition retained earnings 60,000

Increase 60,000

80% 48,000

81,200

Palm Inc.


Year Ended December 31, 2006

Balance January 1 81,200

Net income 101,800

183,000

Dividends 36,000

Balance December 31 147,000

Palm Inc.


December 31, 2006 Cash (20,000 + 30,000) 50,000


Notes receivable 10,000

Inventory (100,000 + 180,000) 280,000

Capital assets (230,000 + 160,000 + 16,000) 406,000

Investments (82,000 + 22,000) 104,000

Customer lists 11,000

Goodwill 40,000

1,149,000

Accounts payable (80,000 + 62,000) 142,000

Other current liabilities (10,000 + 50,000) 60,000

Notes payable (130,000 + 100,000) 230,000



Retained earnings 147,000 647,000

1,149,000

Problem 9

Cost of investment - July 1, 2004 543,840 Dr

Book value of Bondi Ltd.

Common shares 120,000 Dr


628,800 Dr

80% Dr 503,040 Dr



Accounts receivable 24,000 × 80% 19,200 Dr

Inventory 48,000 × 80% 38,400 Dr

Fixed assets – 90,000 × 80% 72,000 Cr

14,400 Cr

Bonds payable – 10,000 × 80% 8,000 Dr 6,400 Cr

Balance - patents 47,200 Dr

Balance Amortization Balance

July 1 Dec. 31 Dec. 31 Dec. 31 Dec. 31

2004 2004 2005 2006 2006

Accounts receivable 19,200 19,200

Inventory 38,400 38,400

Fixed assets – 72,000 – 2,400 – 4,800 – 4,800 – 60,000

Patents 47,200 2,360 4,720 4,720 35,400

32,800 19,160 38,320 – 80 – 24,600

Bonds payable – 8,000 – 1,000 – 2,000 – 2,000 – 3,000

40,800 20,160 40,320 1,920 – 21,600

Calculation of consolidated net income - 2006

Net income Aaron 126,000

Less: Dividends from Bondi (5,000 × 80%) 4,000

Purchase discrepancy amortization 1,920 5,920

120,080

Net income Bondi 8,400

80% 6,720

126,800

Calculation of consolidated retained earnings - Jan. 1, 2006

Retained earnings of Aaron - Jan. 1, 2006 1,242,706

Less: purchase discrepancy amortization (20,160 + 40,320) 60,480

1,182,226

Retained earnings Bondi - Jan. 1, 2006 554,800

Acquisition retained earnings 508,800

Increase since acquisition 46,000

80% 36,800

1,219,026

Calculation of noncontrolling interest - Dec. 31, 2006

Common stock Bondi 120,000

Retained earnings - Jan. 1 554,800

Net income 8,400

Dividends (5,000) 558,200

678,200

20%

135,640

Aaron Co.

Consolidated Financial Statements

December 31, 2006

Income Statement

Sales (1,261,000 + 1,200,000) 2,461,000

Income - other investments 25,000

2,486,000

Cost of goods sold (840,000 + 1,020,000) 1,860,000

Depreciation (60,000 + 54,000 – 4,800) 109,200

Interest (37,000 + 26,400 + 2,000) 65,400

Other (227,000 + 91,200) 318,200

Patent amortization 4,720

2,357,520

Net income - entity 128,480

Less: noncontrolling interest (20% × 8,400) 1,680

Net income 126,800

Retained Earnings Statement

Balance January 1 1,219,026

Net income 126,800

1,345,826

Dividends 50,000

Balance December 31 1,295,826

Problem 13

Cost of investment 4,120,000

Book value of Partridge



4,500,000

80% 3,600,000



Inventory 200,000 × 80% 160,000

Patents 500,000 × 80% 400,000

560,000

Bonds payable 300,000 × 80% 240,000 320,000

Goodwill 200,000

Amortization Schedule


Jan. 2 Dec. 31 Dec. 31 Dec. 31

Year 1 Years 1 & 2 Year 3 Year 3

Inventory 160,000 160,000

Patents 400,000 80,000 40,000 280,000

Goodwill 200,000 20,000 10,000 170,000

760,000 260,000 50,000 450,000

Bonds payable 240,000 48,000 24,000 168,000

520,000 212,000 26,000 282,000

(a) Calculation of consolidated net income - Year 3

Net income Brady 420,000

Less: dividends from Partridge (100,000 × 80%) 80,000

Purchase discrep. amortization 26,000 106,000

314,000

Net income Partridge 200,000

80% 160,000

474,000

Calculation of consolidated retained earnings - Jan. 1, Year 3

Brady retained earnings - Jan.1 6,000,000

Less: amortization of purchase discrepancy 212,000

5,788,000

Partridge retained earnings – Jan. 1 3,000,000

Acquisition retained earnings 2,500,000


80% 400,000

6,188,000

Brady Ltd.

Consolidated Income Statement

for the Year Ended December 31, Year 3

Sales (10,000 + 5,000) 15,000,000

Cost of goods sold (7,000 + 3,000) 10,000,000

Depreciation expense (900 + 400) 1,300,000

Patent amortization (100 + 40) 140,000

Interest expense (480 + 300 - 24) 756,000

Other expense (680 + 850) 1,530,000

Goodwill impairment loss 10,000

Income tax (600 + 150) 750,000

14,486,000


Less: noncontrolling interest (20% × 200,000) 40,000

474,000

Brady Ltd.

Consolidated Statement of Retained Earnings


Balance Jan. 1 6,188,000

Net income 474,000

6,662,000

Dividends 300,000

Balance Dec. 31 6,362,000

(Not required)

Proof: Calc. of consol. retained earnings Dec. 31, Year 3

Brady retained earnings 6,120,000

Less: purchase discrep. amort. (212 + 26) 238,000

5,882,000

Partridge retained earnings 3,100,000

Acquisition retained earnings 2,500,000


80% 480,000

6,362,000

Calculation of noncontrolling interest - Dec. 31, Year 3

Partridge – Common stock 2,000,000


5,100,000

20%

1,020,000

(Not required)

Changes in noncontrolling interest (since acquisition)

Shareholders' equity Partridge, Jan. 2 Year 1 4,500,000

20%

Noncontrolling interest Jan. 2, Year 1 900,000

Increase in retained earnings

to Jan. 1, Year 3 500,000

Noncontrolling interest share 20% 100,000

Noncontrolling interest Jan. 1, Year 3 1,000,000

Allocation of Year 3 net income – entity 40,000

1,040,000

Dividends to noncontrolling shareholders (Year 3)

(20% × 100,000) 20,000

Noncontrolling interest Dec. 31, Year 3 1,020,000

Brady Ltd.


December 31, Year 3

Cash (400 + 600) 1,000,000

Accounts receivable (1,000 + 1,300) 2,300,000

Inventory (4,600 + 1,900) 6,500,000

Plant and equipment (8,000 + 5,000) 13,000,000

Patents (700 + 280) 980,000

Goodwill 170,000

23,950,000

Accounts payable (3,000 + 1,400) 4,400,000

Bonds payable (4,000 + 3,000 + 168) 7,168,000

11,568,000

Noncontrolling interest 1,020,000

Shareholders' equity


Retained earnings 6,362,000 11,362,000

23,950,000

(b) On the balance sheet, the investment account would be computed under the equity

method.

Investment in Partridge – cost Jan. 2, Year 1 4,120,000

Increase in Partridge retained earnings

to Jan. 1 Year 3 500,000

80% 400,000

4,520,000

Amortization of purch. discrep to Dec. 31, Year 2 212,000

Invest. in Partridge – equity method Dec. 31, Year 2 4,308,000


80%

160,000

Year 3 purchase discrepancy amortization 26,000 134,000

4,442,000

Dividends from Partridge (80% × 100,000) 80,000

Invest. in Partridge – equity Dec. 31, Year 3 4,362,000

Retained earnings Brady Jan. 1 Year 3 6,188,000

Retained earnings Brady Dec. 31 Year 3 6,362,000

Investment income


80%

160,000

Year 3 purchase discrepancy amortization 26,000

134,000

On the income statement, investment income of $134,000 would be presented.

Balance Sheet

Cash (120,000 + 84,000) 204,000


Inventory (300,000 + 276,000) 576,000

Fixed assets (net) (720,000 + 540,000 – 60,000) 1,200,000

Other investments 250,666

Patent 35,400

2,560,066


Bonds payable (315,000 + 220,800 – 3,000) 532,800




2,560,066


Intercompany profits

Before tax 40% tax After tax

Opening inventory – L selling 5,000 2,000 3,000 (a)

Ending inventory – K selling 10,000 4,000 6,000 (b)

(a)

December 31

Cash 20,200

Investment in L Co. ($5,000 x 95%) 4,750

Investment in J Co. ($3,000 x 90%) 2,700

Investment in K Co. ($15,000 x 85%) 12,750

To record dividends received from subsidiary companies.

Investment in L Co. (20,000 x 95%) 19,000

Investment in K Co. (30,000 x 85%) 25,500

Investment in J Co. (5,000 x 90%) 4,500

Investment income 40,000

To record share of subsidiaries' income.

Investment Income 2,250

Investment in L Co. (3,000 x .95) 2,850

Investment in K Co. (6,000 x .85) 5,100

To hold back after-tax inventory profit in EI (K Co.) and add back after tax inventory

profit in BI (L. Co.)

Investment Income is $40,000 − $2,250 = $37,750.


Cash 10,000

To record dividends paid.

(b) Calculation of consolidated net income – Year 5

Income of L 20,000

Add: profit in opening inventory (a) 3,000

Adjusted net income 23,000

H Co.'s ownership % 95% 21,850

Income of J (5,000)

H Co.'s ownership % 90% (4,500)

Income of K 30,000

Less: profit in ending inventory (b) 6,000


H Co.'s ownership % 85% 20,400

Consolidated net income, Year 5 37,750

(c) H Company



Retained earnings, January 1 12,000

Add: net income 37,750

49,750


Retained earnings, December 31 39,750

Problem 8

Calculation, allocation, and amortization of purchase discrepancy

Cost of investment, Jan. 1, Year 3 1,600,000

Carrying amounts of Least's net assets:



Total shareholders' equity 1,500,000

Most's ownership % 80% 1,200,000


Allocation: FV - BV

Accounts receivable - 20,000 x 80% - 16,000

Inventories - 50,000 x 80% - 40,000

Plant and equipment (net) 35,000 x 80% 28,000

- 28,000

Long-term liabilities 100,000 x 80% - 80,000 52,000

Balance – goodwill 348,000


Jan. 1 Dec. 31

Year 3 Years 3 to 8 Year 9 Year 9

Accounts receivable - 16,000 - 16,000

Inventories - 40,000 - 40,000

Plant and equipment (net) 28,000 21,000 3,500 3,500 (a)

Goodwill 348,000 52,200 8,700 287,100 (b)

320,000 17,200 12,200 290,600

Long-term liabilities - 80,000 - 80,000 ---

400,000 97,200 (c) 12,200 (d) 290,600

Intercompany revenues and expenses

Sales and purchases (2,000,000 + 1,500,000) 3,500,000 (e)



Loss on land, July 1, Year 7 50,000 20,000 30,000 (f)

realized in Year 9 - Most selling

Opening inventory - Most selling

(312,500 x 0.20) 62,500 25,000 37,500 (g)

- Least selling

(857,140 x 0.30) 257,142 102,857 154,285 (h)

319,642 127,857 191,785 (i)

Ending inventory - Most selling

(500,000 x 0.20) 100,000 40,000 60,000 (j)

- Least selling

(714,280 x 0.30) 214,284 85,714 128,570 (k)

314,284 (l) 125,714 188,570

Deferred charge - income taxes – closing inventory (40,000 + 85,714) 125,714 (m)

Calculation of consolidated retained earnings – Jan. 1 Year 9

Retained earnings of Most, Jan. 1, Year 9 9,750,000

Less: Amortization of purchase discrepancy (c) 97,200

Profit in opening inventory (g) 37,500 134,700

9,615,300

Add: land loss (f) 30,000

Adjusted retained earnings 9,645,300

Retained earnings of Least, Jan. 1, Year 9 2,000,000

Retained earnings of Least at acquisition 1,000,000

Increase 1,000,000

Less: profit in opening inventory (h) 154,285

Adjusted increase 845,715

Most's ownership % 80% 676,572

Consolidated retained earnings, Jan. 1, Year 9 10,321,872

Calculation of consolidated net income – Year 9

Income of Most 1,000,000

Less: Amortization of purchase discrepancy (d) 12,200

Dividends from Least (100,000 x 80%) 80,000

Profit in closing inventory (j) 60,000

Land loss (f) 30,000 182,200

817,800

Add: profit in opening inventory (g) 37,500


Income of Least 400,000

Add: profit in opening inventory (h) 154,285

554,285

Less: profit in closing inventory (k) 128,570


Least's ownership % 80% 340,572

Consolidated net income, Year 9 1,195,872

(a) Most Company


Year 9

Retained earnings, Jan. 1 10,321,872

Add: net income 1,195,872

11,517,744


Retained earnings, Dec. 31 11,167,744

Proof of consolidated retained earnings

Retained earnings of Most, Dec. 31, Year 9 10,400,000

Less: Amortization of purchase discrepancy

((c)97,200 + (d)12,200) 109,400

Profit in ending inventory (j) 60,000 169,400

Adjusted retained earnings 10,230,600

Retained earnings of Least, Dec. 31, Year 9 2,300,000

Retained earnings of Least at acquisition 1,000,000

Increase 1,300,000

Less: profit in ending inventory (k) 128,570

Adjusted increase 1,171,430

Most's ownership % 80% 937,144

Consolidated retained earnings, Dec. 31, Year 9 11,167,744

Calculation of noncontrolling interest

Retained earnings of Least 2,300,000

Common stock of Least 500,000

Total shareholders' equity 2,800,000

Less: profit in ending inventory (k) 128,570

Adjusted shareholders' equity 2,671,430

20%

Noncontrolling interest, Dec. 31, Year 9 534,286

(b) Most Company


December 31, Year 9

Cash (500,000 + 40,000) 540,000

Accounts receivable (1,700,000 + 500,000 - 80,000* [dividend]) 2,120,000

Inventories (2,300,000 + 1,200,000 - (l)314,284) 3,185,716

Plant and equipment (net) (8,200,000 + 4,000,000 + (a)3,500) 12,203,500

Land (700,000 + 260,000) 960,000

Goodwill (b) 287,100

Deferred charge - income taxes (m) 125,714

Total assets 19,422,030

Current liabilities (600,000 + 200,000 - 80,000 [dividend]*) 720,000

Long-term liabilities (3,000,000 + 3,000,000) 6,000,000




Total liabilities & shareholders' equity 19,422,030

* Assuming that dividends declared Dec. 31, Year 9, have not yet been paid.

(c) The matching principle requires that expenses be matched to revenues. When

intercompany sales occur, the sales must be eliminated because the sales did not take

place with an entity outside of the reporting entity. Once sales are eliminated, the cost of

goods sold related to the sales must also be eliminated. Otherwise, the cost of goods sold

would not be matched to any revenues.

Problem 13

Purchase discrepancy amortization – Year 5

Plant and equipment depreciation (60,000 / 5) 12,000 (a)

Patent amortization (40,000 / 8) 5,000 (b)

Goodwill impairment loss 3,000 (c)

20,000


Sales – Runner to Road 400,000 (d)

Rental – Runner to Road 35,000 (e)



Opening inventory – Runner selling 75,000 30,000 45,000 (f)

Ending inventory – Runner selling 40,000 16,000 24,000 (g)

(a) Road Ltd.



Sales (4,000,000 + 2,100,000 - (d)400,000) 5,700,000

Rental revenue (70,000 - (e)35,000) 35,000

Total revenue 5,735,000

Cost of goods sold

(2,000,000 + 800,000 - (d)400,000 - (f)75,000 + (g)40,000) 2,365,000

Selling and administrative expense (550,000 + 480,000) 1,030,000

Interest expense (250,000 + 140,000) 390,000

Depreciation (450,000 + 225,000 + (a)12,000) 687,000

Patent amortization (25,000 + (b)5,000) 30,000

Goodwill impairment loss (c) 3,000

Income tax (300,000 + 200,000 + (f)30,000 - (g)16,000) 514,000

Total expenses 5,019,000


Less: noncontrolling interest

(30% x [300,000 + (f)45,000 - (g)24,000]) 96,300

Net income 619,700

(b) Road Ltd.


Year 5

Retained earnings, January 1 2,000,000


2,619,700


Retained earnings, December 31 2,519,700

Problem 14


Cost of investment, January 1, Year 1 65,000 Dr

Carrying amounts of Sage's net assets:

Common stock 50,000 Dr


Total shareholders' equity 65,000 Dr

Post's ownership % 70% Dr 45,500 Dr


Allocation FV - BV

Inventory -12,000 x 70% - 8,400 Cr

Equipment 18,000 x 70% 12,600 Dr 4,200 Dr

Balance – goodwill 15,300 Dr


January 1 December 31

Year 1 Years 1 & 2 Year 3 Year 3

Inventory - 8,400 - 8,400

Equipment 12,600 5,040 2,520 5,040 (a)

Goodwill 15,300 3,060 1,530 10,710 (b)

19,500 - 300 (c) 4,050 (d) 15,750

Intercompany receivables and payables – notes 55,000 (e)


Management fee 26,500 (f)

Sales and purchases

Post selling 125,000

Sage selling 90,000 215,000 (g)

Interest (12% x 1/2 x 55,000) 3,300 (h)



Land - Sage selling 30,000 12,000 18,000 (i)

Opening inventory - Sage selling

(14,000 x 0.25) 3,500 1,400 2,100 (j)

Ending inventory - Sage selling

(28,000 x 0.25) 7,000 2,800 4,200 (k)

- Post selling

(18,000 x 0.25) 4,500 1,800 2,700 (l)

11,500 4,600 6,900 (m)

Deferred charge - income taxes – December 31, Year 3

Inventory 4,600

Land 12,000

16,600 (n)

Calculation of consolidated net income

Income of Post 117,000

Less: Dividends from Sage (15,000 x 70%) 10,500

Amortization of purchase discrepancy (d) 4,050

Profit in ending inventory (l) 2,700 17,250


Income of Sage 24,000

Add: profit in opening inventory (j) 2,100

26,100

Less: Profit in ending inventory (k) 4,200

Land gain (i) 18,000 22,200


Post's ownership % 70% 2,730

Consolidated net income, Year 3 102,480

(a) Post Corporation


Year 3

Sales (900,000 + 240,000 – (g)215,000) 925,000

Interest revenue (6,800 - (h)3,300) 3,500

Total revenue 928,500

Cost of goods sold

(540,000 + 162,000 - (g)215,000 - (j)3,500 + (m)11,500) 495,000

Interest expense (20,000 - (b)3,300) 16,700

Other expense

(180,000 + 74,800 - (f)26,500 + (a)2,520) 230,820

Goodwill impairment loss (b) 1,530

Income tax expense

(80,000 + 16,000 + 1,400 - 4,600 - 12,000) 80,800

Total expenses 824,850


Noncontrolling interest (3,900 x 30%) 1,170

Consolidated net income 102,480

Calculation of consolidated retained earnings – January 1, Year 3

Retained earnings of Post, January 1, Year 3 158,000

Less: amortization of purchase discrepancy (c) – 300

Adjusted retained earnings 158,300

Retained earnings of Sage, January 1, Year 3 72,000

Retained earnings of Sage at acquisition 15,000

Increase 57,000

Less: profit in opening inventory (j) 2,100


Post's ownership % 70% 38,430

Consolidated retained earnings, January 1, Year 3 196,730

(b) Post Corporation



Retained earnings, January 1 196,730


299,210


Retained earnings, December 31 249,210

Calculation of noncontrolling Interest – December 31, Year 3

Common stock 50,000

Retained earnings (72,000 + 24,000 - 15,000) 81,000

Total shareholders' equity 131,000

Less: Profit in ending inventory (k) 4,200

Land gain (i) 18,000 22,200

Adjusted shareholders' equity 108,800

Noncontrolling interest’s share 30%

Noncontrolling interest, December 31, Year 3 32,640

(c) Post Corporation


December 31, Year 3

Cash (12,200 + 12,900) 25,100)

Accounts receivable (17,200 + 9,100) 26,300)

Inventory (32,000 + 27,000 - (m)11,500) 47,500)

Land (175,000 + 19,000 - (i)30,000) 164,000)

Plant and equipment (520,000 + 65,000 + (a)12,600) 597,600)

Accumulated depreciation ([229,400] + [17,000] + (a)[7,560]) (253,960)

Goodwill (b) 10,710)

Deferred charge - income taxes (n) 16,600)

Total assets 633,850)

Accounts payable (212,000 + 40,000) 252,000)

Noncontrolling interest 32,640)

Common stock 100,000)

Retained earnings 249,210)

Total liabilities and shareholders’ equity 633,850)


Purchase discrepancy - buildings 1,250 (a)

Yearly amortization (25,000 / 20)


Interest revenue and expense (12,000 × ½) 6,000 (b)

Rental revenue and administrative expense 50,000 (c)

Sales and purchases 90,000 (d)



Land gain - M selling

realized in Year 6 10,000 4,000 6,000 (e)

Opening inventory - K selling 12,000 4,800 7,200 (f)

Ending inventory - K selling 5,000 2,000 3,000 (g)

Machinery gain - M selling

realized by depreciation in Year 6

(13,000 / 5) 2,600 1,040 1,560 (h)

Calculation of noncontrolling interest in net income of K Company – Year 6

Income of K 25,500

Add: profit in opening inventory (f) 7,200

32,700

Less: profit in ending inventory (g) 3,000


Noncontrolling interest’s share 20%

Noncontrolling interest, Year 6 5,940 (i)

M Co.


Year 6

Sales (600,000 + 350,000 - (d) 90,000) $860,000

Interest revenue (6,700 - (b) 6,000) 700

Gain on land sale (8,000 + (e) 10,000) 18,000

Total revenues 878,700

Cost of goods sold

(334,000 + 225,000 - (d) 90,000 - (f) 12,000 + (g) 5,000) 462,000

Depreciation expense (20,000 + 70,000 - (h) 2,600 + (a) 1,250) 88,650

Administrative expense (207,000 + 74,000 - (c) 50,000) 231,000

Interest expense (1,700 + 6,000 - (b) 6,000) 1,700

Income tax expense

(20,700 + 7,500 + (e) 4,000 + (f) 4,800 - (g) 2,000 + (h) 1,040) 36,040

Total expenses 819,390


Noncontrolling interest (i) 5,940

Consolidated net income $ 53,370

Problem 9


Cost of 85% investment in Sloan Ltd. 3,025,000 Dr

Carrying amounts of Sloan's net assets:

Common stock 2,200,000 Dr

Retained earnings 1,100,000 Dr

Total shareholders' equity 3,300,000 Dr

Porter's ownership % 85% Dr 2,805,000Dr

Purchase discrepancy 220,000Dr

Allocation:

FV - BV

Plant & equipment 200,000 × 85% 170,000 Dr

Accounts receivable - 75,000 × 85% - 63,750 Cr

106,250 Dr

Long-term liabilities - 62,500 × 85% - 53,125 Dr 159,375Dr

Balance – goodwill 60,625 Dr

Amortization

Balance Balance

Jan. 1/1 Years 1 to 3 Year 4 Dec. 31/4

Plant & equipment 170,000* 25,500) 8,500 136,000

Accounts receivable - 63,750* - 63,750) - -

Goodwill 60,625* 36,375) 12,125 12,125 (a)

166,875* (1,875) 20,625 148,125

Long-term liabilities - 53,125* - 18,750) - 6,250 - 28,125

Total 220,000* 16,875) 26,875 176,250 (b)

*8½ years remaining to maturity

Intercompany dividend revenue (98,000 × 85%) 83,300) (c)

Intercompany Profits (Losses)


Patent, Jan. 1, Year 2 – Sloan selling (20,000) (8,000) (12,000)

Amortization Years 2 and 3 (8,000) (3,200) (4,800) (d)

Balance, Dec. 31, Year 3 (12,000) (4,800) (7,200)

Amortization Year 4 (4,000) (1,600) (2,400) (e)

Balance, Dec. 31, Year 4 (8,000) (3,200) (4,800) (f)

Land Year 3 - Porter selling 21,000) 8,400) 12,600) (g)

Inventories

Beginning - Porter selling 14,000) 5,600) 8,400) (h)

- Sloan selling 1,500) 600) 900) (i)

Totals 15,500) 6,200) 9,300)

Ending - Porter selling 10,000) 4,000) 6,000) (j)

- Sloan selling 2,500) 1,000) 1,500) (k)

Totals 12,500) 5,000) 7,500)

(a) (i) Patent (263,000 + (f) 8,000) 271,000)

(ii) Goodwill (a) 12,125)

(iii) Noncontrolling interest

Shareholders' equity Sloan (1,409,000 + 2,200,000) 3,609,000)

Add: patent loss (f) 4,800)

3,613,800)

Less: ending inventory profit (k) 1,500)

Adjusted shareholders' equity 3,612,300)

Noncontrolling interest’s share 15% )

541,845)

(iv) Retained earnings

Retained earnings Porter, Dec. 31, Year 4 4,833,000)

Less: Purchase discrepancy amortization

((b) 16,875 + (b) 26,875) 43,750

Land gain (g) 12,600

Ending inventory profit (j) 6,000 62,350)

Adjusted retained earnings 4,770,650)

Retained earnings Sloan, Dec. 31, Year 4 1,409,000

At acquisition 1,100,000

Increase 309,000

Add: patent loss (f) 4,800

313,800

Less: ending inventory profit (k) 1,500


Porter's ownership % 85% 265,455)

5,036,105)

(v) Deferred charge - income taxes

Land gain (g) 8,400)

Ending inventory (l) 5,000)

Patent loss (f) (3,200)

10,200)

(b) Porter's total revenues $2,576,000

Less: dividends from Sloan (c) 83,300

2,492,700

Intercompany investment income

Sloan's net income 177,000

Less: Patent loss amortized (e) 2,400

Ending inventory profit (k) 1,500 3,900

173,100

Add: beginning inventory profit (I) 900


Porter's ownership % 85%

147,900

Add: beginning inventory profit (Porter selling) (h) 8,400

156,300

Less: Ending inventory profit (i) 6,000

Purchase discrepancy

amortization (b) 26,875 32,875 123,425

Total revenues Porter - equity $2,616,125

Documents

Chapter 2, Problem 3 - UTORweb assets (24,000 + 6,000 – 592) 29,408 Dr 493,400 Dr Current liabilities (63,000 + 30,000) 93,000 Dr Long-term debt (97,500 + 45,000 - 5,000) 137,500