Accounting question

ACCT 4455 Assignment 3: 63 marks

Question 1 (63 marks)

#1: Calculation and Allocation of Acquisition differential

Cost of 70% of Sub $ 8,400,000

Implied value of 100% (8,400/0.70) 12,000,000

Book value of Sub

Common shares 2,000,000

Retained earnings 6,000,000 8,000,000

Acquisition differential 4,000,000

FVIs

Inventory (100,000)

Equipment 400,000 300,000

Balance — goodwill $ 3,700,000

#2: Acquisition differential amortization and impairment loss schedule

Balance at Amortization/Impairment Balance at

Dec 31, Yr 5 Years 6-9 Year 10 Dec 31, Year 10

Inventory $ (100,000) $ (100,000) $ 0 $ 0 (a)

Equipment (8 yrs) 400,000 200,000 50,000 150,000 (b)

Goodwill 3,700,000 120,000 380,000 3,200,000 (c)

Total $ 4,000,000 $ 220,000 $ 430,000 $ 3,350,000 (d)

#3: Intercompany P/G/Ls

Before tax 40% tax After tax

Land – UP Year 8

Unrealized Gain to Dec 31, Year 9 400,000 160,000 240,000 (i)

Realized gain in Year 10 (30%) 120,000 48,000 72,000 (j)

Unrealized gain left Dec 31 Year 10 280,000 112,000 168,000 (k)

Beginning inventory (100,000 × 30%) UP 30,000 12,000 18,000 (g)

Ending inventory (600,000 × 75% × 30%) UP 135,000 54,000 81,000 (h)

Recommend you write this information below directly onto the FSs given hence you will

see these adjustments when you prepare the Cons FSs.

Intercompany sales and cost of goods sold $ 600,000 (e) adjust on FSs directly

Intercompany dividend (800,000 × 70%) 560,000 (f) adjust on FSs directly

ACCT 4455 Fall 2017

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a. Consolidated net income for Year 10

Current year impact only and after tax

Par’s net income - cost method $ 3,200,000

Less: Dividend income from Sub ($800,000 × 70%) 560,000

Par’s net income, own operations 2,640,000

Sub net income $ 1,400,000

Less: AD amortization/impairment 430,000

+/- Upstreams: Add BI after tax (g) 18,000

: Less EI after tax (h) 81,000

: Add realized gain on land after tax (j) 72,000 979,000

Consolidated net income 3,619,000

Attributable to

Par (equity basis) 2,640,000 + (979,000 x 70%) 3,325,300

Non-controlling interest ($979,000 × 30%) 293,700

b. Consolidated retained earnings at January 1, Year 10 (= Dec 31, Year 9)

Adjustments to December 31, year 9 and after tax

Par’s retained earnings, January 1, Year 10 (= Dec 31, Year 9)

(End 13,200,000 – NI 3,200,000 + Divs 2,600,000) 12,600,000

Sub’s RE January 1 Year 10

(End 10,400,000 – NI 1,400,000 + Divs 800,000) 9,800,000

Sub’s retained earnings, at acquisition 6,000,000

Change in retained earnings since acquisition 3,800,000

Less AD to Dec 31, Year 9 (d) (220,000)

Upstreams: less BI - net of tax (g) (18,000)

: less unrealized Land gain: Dec 31 Yr 9 net tax (i) (240,000)

3,322,000

Par’s share @ 70% 2,325,400

Consolidated retained earnings, January 1, Year 10 $ 14,925,400

ACCT 4455 Fall 2017

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c. use before tax #s (except for income tax expense) and current year impact only

Par Company

Consolidated Income Statement

For the year ended December 31, Year 10

Sales (24,800,000 + 12,000,000 - (e) 600,000) $ 36,200,000

Other income (4,000,000 + 1,000,000 – (f) 560,000 + (j) 120,000) 4,560,000

Cost of goods sold (18,000,000 + 8,200,000 – (g) 30,000 - (e) 600,000

+ (h) 135,000) 25,705,000

Depreciation expense (3,400,000 + 1,800,000 + (b) 50,000) 5,250,000

Other expenses (3,000,000 + 1,200,000) 4,200,000

Goodwill impairment loss (c) 380,000

Income tax expenses (1,200,000 + 400,000 + (g) 12,000

– (h) 54,000 + (j) 48,000) 1,606,000

Net income $ 3,619,000

Attributable to:

Par (equity basis) 2,640,000 + (979,000 x 70%) 3,325,300

Non-controlling interest ($979,000 × 30%) 293,700

Par Company

Consolidated Statement of Retained Earnings

For the year ended December 31, Year 10

Consolidated retained earnings at January 1 14,925,400

Net income attributable to parent 3,325,300

Less: Dividends 2,600,000

Consolidated retained earnings at December 31 $15,650,700

Calculation of NCI at December 31, Year 10

Sub’s common shares at Dec. 31, Year 10 $2,000,000

Sub’s retained earnings at December 31, Year 10 10,400,000 $12,400,000

Plus AD remaining at December 31, Year 10 (d) 3,350,000

Less Upstream unrealized: EI profit – net of tax (h) 81,000

: Land gain – net of tax (k) 168,000 3,101,000

15,501,000

x 30%

NCI $4,650,300*

ACCT 4455 Fall 2017

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Balances at December 31, year 10 and before tax #s except DTA/L and RE

Template: 100% Par’s + 100% Sub’s +/- 100% AD

Par Company

Consolidated Balance Sheet

At December 31, Year 10

Current assets (15,000,000 + 8,800,000 – 135,000 (h)) $ 23,665,000

Non-current assets (20,200,000 + 17,400,000 + 150,000 (b)

- 280,000 (k) 37,470,000

Goodwill (c) 3,200,000

Deferred tax asset (54,000 (h) + 112,000 (k)) 166,000

Total assets $ 64,501,000

Liabilities (26,400,000 + 13,800,000) $ 40,200,000

Common shares 4,000,000

Retained earnings 15,650,700

Non-controlling interest* 4,650,300

Total liabilities and equity $ 64,501,000

d. Sales 600,000

CGS 600,000

CGS 135,000

Inventory 135,000

Deferred tax asset 54,000

Income tax expense 54,000

e. The return on total shareholders’ equity would increase for the following reasons:

 Net income would increase because goodwill impairment would be less as the non-controlling interests’ share of goodwill is not reported using this method.

 Shareholders’ equity would decrease because non-controlling interests would be less as the non-controlling interests’ share of goodwill is not reported using this

method.