Assignment 1
Problem 1
Pre-Contribution Balance Sheets and Fair Values
June 30, 20X9
(in thousands of $)
Swag Co. Perk Ltd.
Pre-
Contribution
Fair
Value
Pre-
Contribution
Fair
Value
Assets:
Cash and cash equivalents
1,645
1,645
840
840
Accounts receivable
1,400
1,400
1,260
1,260
Land
3,500
5,950
–
–
Building (net)
9,450
7,700
5,880
7,700
Equipment (net)
420
525
2,170
2,800
Total assets
16,415
10,150
Liabilities and
shareholders equity:
Accounts payable
455
455
770
770
Long-term debt
1,400
1,400
700
630
Total liabilities
1,855
1,470
Common shares
10,500
4,865
Retained earnings
4,060
3,815
Total shareholders equity
14,560
8,680
Total liabilities and
shareholders equity
16,415
10,150
Swag Co. acquired Perk on June 30, 20X9. Both companies have June 30 year-ends. Before the combination, Swag and Perk had, respectively, 840,000 and 525,000 common shares, issued and outstanding.
Required:
Prepare Swags consolidated balance sheet under each of the following independent situations:
a) Swag purchased the assets and assumed the liabilities of Perk by
paying $1,400,000 in cash and issuing a $12,600,000 note.
b) Swag issued 280,000 common shares in exchange for all of
Perks outstanding shares. The fair value of the Swag shares
was $14,000,000.
c) In exchange for all of Perks outstanding shares, Swag paid
$700,000 cash and issued 189,000 common shares with a
market value of $9,450,000.
Problem 2
Balance Sheets
December 31, 20X3
Green Tower
Ltd.
Blue Loft
Ltd.
Assets:
Current assets:
Cash
$ 156,000
$ 143,000
Accounts receivable
195,000
175,500
Inventory
312,000
253,500
Total current assets
663,000
572,000
Land
923,000
–
Equipment
897,000
1,183,000
Accumulated amortization
(663,000)
(416,000)
Investment in Blue Loft
1,409,200
–
Goodwill*
98,800
__-____
Total assets
3,328,000
1,339,000
Liabilities and shareholders equity:
Liabilities:
Accounts payable
184,600
78,000
Bonds payable
780,000
260,000
Total liabilities
964,600
338,000
Shareholders equity:
Common shares
650,000
325,000
Retained earnings
1,713,400
676,000
Total shareholders equity
2,363,400
1,001,000
Total liabilities and shareholders equity
$3,328,000
$1,339,000
*from an acquisition prior to Blue Loft
Income Statements
Year Ended December 31, 20X3
Green Tower
Ltd.
Blue Loft
Ltd.
Sales revenue
$1,560,000
$1,283,100
Cost of goods sold
1,040,000
845,000
520,000
438,100
Gain on sale of land
___-___
273,000
520,000
711,100
Operating expense
305,500
464,100
Net income
214,500
247,000
Statements of Retained Earnings
Year Ended December 31, 20X3
Green Tower
Ltd.
Blue Loft
Ltd.
Retained earnings, December 31, 20X2
$1,498,900
$ 429,000
Net income
214,500
247,000
Retained earnings, December 31, 20X3
$1,713,400
$ 676,000
Blue Loft Ltd.
Carrying and Fair Values
January 1, 20X2
Carrying
Value
Fair
Value
Cash
$ 104,000
$ 104,000
Accounts receivable
128,700
128,700
Inventory
231,400
253,500
Land
650,000
811,000
Equipment
390,000
151,000
Accumulated amortization
(260,000)
Accounts payable
91,000
91,000
Bonds payable
260,000
260,000
Common shares
325,000
–
Retained earnings
568,100
–
On January 1, 20X2, Green Tower Ltd. acquired all the outstanding common shares of Blue Loft Ltd. for $1,409,200 cash.
At December 31, 20X2, Green Towers inventory included goods that it had purchased from Blue Loft for $58,500. The intercompany profit on these goods was $15,600. All these goods were sold to third parties in 20X3.
During 20X3, Green Tower purchased goods from Blue Loft for $195,000. Blue Loft earned a gross profit of $65,000 on this sale. At December 31, 20X3, Green Tower still had 40% of these goods in its inventory.
During 20X3, Green Tower sold goods to Blue Loft for $507,000. Green Tower earned a gross profit of $117,000 on this sale. At December 31, 20X3, Blue Loft still had 20% of these goods in its inventory.
In December, 20X3, Blue Loft sold a tract of land to Green Tower for $923,000. Blue Loft had purchased the land 8 years ago for $650,000.
At the time of Green Towers acquisition, Blue Lofts equipment had a remaining estimated useful life of 3 years. Blue Loft uses the straight-line method of amortization, with no residual value.
Required:
Prepare the consolidated financial statements for 20X3 using the direct method.
Problem 3
Cox Ltd. acquired 70% of the common shares of March Co. at the beginning of 20X7. At the acquisition date, Marchs shareholders equity consisted of the following:
Common shares $720,000
Retained earnings 360,000
The only acquisition differential pertained to goodwill.
Coxs Investment in March general ledger account is as follows:
1/2/X7 Cost $ 781,200
12/31/X7 Dividends $33,600
12/31/X7 Investment Income 62,160
12/31/X8 Dividends 42,000
12/31/X8 Investment Income 76,440
12/31/X9 Dividends 50,400
12/31/X9 Investment income 94,080
Balance $ 887,880
March usually declares half of its profits as dividends.
Cox uses the entity theory method to consolidate its subsidiary.
Required:
a) Calculate the total amount of dividends declared by March for 20X7.
b) Calculate Marchs profit for 20X8.
c) Calculate the non-controlling interest amounts for Coxs 20X9
i. consolidated income statement, and
ii. consolidated balance sheet.
d) Calculate the amount of goodwill that should appear on Coxs 20X9 consolidated balance sheet.
Problem 4
Balance Sheets
December 31, 20X6
Peony
Ltd.
Aster
Ltd.
Assets:
Cash
$ 62,500
$ 25,000
Accounts receivable
187,500
200,000
Inventories
225,000
125,000
Equipment
6,250,000
3,375,000
Accumulated amortization
(2,212,500)
(1,550,000)
Investment in Aster Ltd.
1,000,000
–
Other investments
125,000
____-____
Total assets
$5,637,500
$2,175,000
Liabilities and Shareholders Equity
Accounts payable
$ 562,500
$ 250,000
Bonds payable
375,000
625,000
Total liabilities
937,500
875,000
Common shares
1,500,000
375,000
Retained earnings
3,200,000
925,000
Total shareholders equity
4,700,000
1,300,000
Total liabilities and shareholders equity
$5,637,500
$2,175,000
Income Statements
Year Ended December 31, 20X6
Peony
Ltd.
Aster
Ltd.
Sales revenue
$2,500,000
$1,875,000
Royalty revenue
187,500
–
Dividend income
93,750
____-____
Total revenue
2,781,250
1,875,000
Cost of sales
1,500,000
1,125,000
Other expenses
700,000
513,750
Total expenses
2,200,000
1,638,750
Net income
$ 581,250
$ 236,250
Statements of Retained Earnings
December 31, 20X6
Peony
Ltd.
Aster
Ltd.
Retained earnings, beginning of year
$2,993,750
$ 801,250
Net income
581,250
236,250
Dividends declared
(375,000)
(112,500)
Retained earnings, end of year
$3,200,000
$ 925,000
At January 1, 20X1, Peony Ltd. acquired 80% of the common shares of Aster Ltd. by issuing 500,000 Peony common shares valued at $2 per share. This resulted in Peony having 1,500,000 issued and outstanding shares.
Peony has provided the following information about Aster at the acquisition date:
Asters shareholders equity consisted of the following:
Common shares $375,000
Retained earnings 693,750
Fair value of Asters net identifiable assets equalled their carrying value, with the exception of the following items:
Excess of fair value
over carrying value:
Inventories $ 12,500
Equipment 93,750
Investments 12,500
The accumulated amortization on the equipment was $718,750. The equipment is amortized on a straight-line basis. At the acquisition date, the equipment is estimated to have a remaining life of 10 years with no residual value.
In 20X3, Aster sold its investments to parties outside the consolidated entity for $56,250 over carrying value.
From the acquisition date to December 31, 20X5, Aster paid royalties of $625,000 to Peony. During 20X6, Aster paid $112,500 in royalties to Peony.
At the beginning of 20X4, Peony purchased some equipment from Aster for $113,750. Aster had originally acquired the equipment for $125,000 and was amortizing it at a rate of $12,500 per year. When Aster sold the equipment to Peony, it had a carrying value of $87,500. At that time, Peony estimated that the equipment had a remaining life of 7 years and started amortizing the equipment in 20X4, using the straight-line method with no residual value.
At December 31, 20X5, Asters inventory included $25,000 of goods purchased from Peony. Peonys gross margin on the sale was 40%. The goods were sold to third parties in 20X6.
At December 31, 20X5, Peonys inventory included $125,000 of goods purchased from Aster. Asters gross margin on the sale was 40%. The goods were sold to third parties in 20X6.
During 20X6, Peony sold goods to Aster for $125,000. Peonys gross margin on the sale was 40%. At December 31, 20X6, $50,000 of the goods are still in Asters inventory.
During 20X6, Aster sold goods to Peony for $875,000. Asters gross margin on the sale was 40%. At December 31, 20X6, $87,500 of the goods are still in Peonys inventory.
Peony uses the entity method to report business combinations.
Required:
Prepare the consolidated financial statements for Peony at December 31, 20X6 using the direct method. Show all your work.
Problem 5
On January 1, 20X4, Chee Co. purchased 80% of the outstanding shares of Tyme Ltd. for $2,000,000 in cash. On the acquisition date, Tymes shareholders equity consisted of the following:
Common shares $1,600,000
Retained earnings 800,000
At the time of acquisition, the carrying values of Tymes identifiable net assets equalled their fair market values with the following exceptions:
The fair value of a building with an estimated remaining life of 10 years was $480,000 less than its carrying value.
A long-term liability that matures in 8 years has a fair value that is $400,000 less than its carrying value.
The condensed income statements for Chee and Tyme are presented below:
Income Statements
Year ended December 31, 20X8
Chee Co.
Tyme Ltd.
Sales
$1,600,000
$ 720,000
Investment income
800,000
80,000
Gain on sale of land
___-___
54,400
Total revenue
2,400,000
854,400
Cost of goods sold
1,040,000
400,000
Other expenses
768,000
256,000
Total expenses
1,808,000
656,000
Net income
$ 592,000
$ 198,400
Additional information:
At the beginning of 20X5, Chee acquired a piece of equipment from Tyme for $168,000. Tyme had purchased the equipment 5 years ago for $320,000. When Tyme purchased the equipment, it had expected that it would have a useful life of 20 years, with no residual value. Chee concurred with this estimate (i.e., at the time of purchase, Chee expected that the equipment would have a remaining useful life of 15 years). Both Tyme and Chee use the straight-line method of amortization.
Sale of goods from Chee to Tyme:
Gross Unsold Goods in Tymes
Year Sales Margin Inventory at Year-End
20X7 $400,000 30% $80,000
20X8 320,000 30% 72,000
Sale of goods from Tyme to Chee:
Gross Unsold Goods in Chees
Year Sales Margin Inventory at Year-End
20X7 $240,000 40% $56,000
20X8 200,000 40% 48,000
All goods in inventory at year-end were sold to third parties in the subsequent year.
On August 31, 20X8, Chee purchased a tract of land from Tyme for $106,400 in cash. Tyme had acquired the land 12 years previously for $52,000.
During 20X8, Chee declared and paid dividends of $200,000 and Tyme declared and paid dividends of $32,000.
There was no impairment of goodwill at the end of 20X8.
Chee accounts for its investments using the cost method and uses the entity theory method to report its business combinations.
Required:
a) Prepare a consolidated income statement for Chee Co. for the year ended December 31, 20X8. Be sure to show your supporting calculations.
b) Prove that your calculation of net income attributable to the shareholders of Chee Co. in (a) is correct by calculating Chees net income using the equity method.
Problem 6
At the beginning of 20X3, Jong Ltd. acquired 80% of the outstanding shares of Nye Co. for $1,400,000. At the acquisition date, Nyes shareholders equity consisted of the following:
Common shares $350,000
Retained earnings 875,000
At the time of acquisition, all of Nyes net identifiable assets had carrying values that equalled their fair values with the exception of its patents. The fair value of the patents exceeded their carrying values by $525,000 and had a remaining life of 8 years.
The trial balances for Jong and Nye for December 31, 20X6 are as follows:
Jong Ltd. Nye Co.
DR
CR
DR
CR
Cash
700,000
350,000
Accounts receivable
1,400,000
249,200
Inventory
2,100,000
1,575,000
Plant and equipment
9,800,000
1,750,000
Accumulated amortization
2,800,000
700,000
Patents
280,000
Investment in Nye
1,400,000
Investment in Jong bonds
170,800
Accounts payable
1,744,400
1,734,950
Bonds payable
350,000
Premium on bonds payable
5,600
Common shares
3,150,000
350,000
Retained earnings
7,000,000
1,400,000
Dividends
420,000
175,000
Sales
3,430,000
1,400,000
Dividend revenue
140,000
Interest revenue
15,050
Cost of goods sold
1,680,000
595,000
Operating expenses
673,400
210,000
Interest expense
26,600
Income tax expense
420,000
_________
245,000
________
18,620,000
18,620,000
5,600,000
5,600,000
Additional information:
20X6 net income for Jong is $770,000 and for Nye, $365,050.
At the beginning of 20X6, Jong purchased a piece of equipment from Nye for $350,000. At the time of purchase, the equipment had a net book value of $280,000 to Nye and an estimated useful life of 5 years.
At the end of 20X5, Jongs inventory included $350,000 of goods purchased from Nye. Nyes had recorded a gross profit of $140,000 on this sale.
During 20X6, Nye sold goods to Jong for $700,000. Nye earned a gross profit of $280,000 on this sale.
At the end of 20X6, Jong had sold all the goods in its opening inventory to third parties but still had $210,000 of the goods purchased from Nye during 20X6 in its ending inventory. All of those goods will be sold to third parties in 20X7.
Amortization expense for the plant, equipment, and patent are included in operating expenses.
At the beginning of 20X4, Jong issued bonds for $359,800. These bonds have an interest rate of 8%, mature in 7 years, and have a face value of $350,000. Interest will be paid annually at the end of the year. Nye purchased half of these bonds at the beginning of 20X6 for $169,750. Any intercompany gains or losses on these bonds are to be allocated between the two companies.
Both companies have an average income tax rate of 40%.
Required:
