Accounting question 1

The financial statement of Pa and Son as at December 31, Year 6 are shown below:

Balance sheet

At December 31, year 6

Assets Pa Son

Cash $ 14,000 $ 16,800

Receivables 25,000 21,000

Inventory 45,000 50,000

Land 20,000 10,000

Property, plant and equipment 175,000 250,000

Accumulated depreciation 35,000 40,000

Other assets 59,600 --

Investment in Son 170,000 --

473,600 307,800

liabilities and share holders’ equity

current liabilities 36,400 37,800

long-term liabilities ----- 102,500

common shares 350,000 125,000

retained earnings 87,200 42,500

$ 473,600 $307,800

statement of retained earnings

For the year ended December 31, year 6

Pa Son

Retained earnings, Jan 1 77,600 25,000

Net Income 34,600 29,500

Dividends 25,000 12,000

Retained earnings 87,200 42,500

Income Statement

For the year ended December 31, year 6

Pa Son

Sales revenue 430,200 270,000

Other income 42,400 ------

Cost of goods sold 350,000 173,000

Depreciation & amortization expense 18,000 28,000

General and administration expense 57,000 19,000

Interest expense ---- 9,500

Income tax expense 13,000 11,000

Net income 34,600 29,500

1. Pa acquired 80% of Son’s common stock on January 1, year 1 for $170,000. At that date, Son’s reported a retained earnings balance of $20,000 and common shares $125,000. On that date, Son’s net assets were equal to fair market value with the exception of the following:

Carrying Value Fair Value

Inventory $50,000 $60,000

Equipment (10 years useful life remaining) $260,000 $240,000

Land $10,000 $12,000

2. Annual impairment tests of goodwill result in losses of $8,000 in year 3 and $2,500 in year 6.

3. Pa uses the cost method.

4. Assume 40% corporate tax rate.

5. Son’s sales during year 6 include $70,000 of sales to Pa. Goods purchased from Son and included in Pa’s inventories were $50,000 at the end of year 5 and $30,000 at the end of year 6. Son’s gross profit margin to Pa is 30%.

6. During year 6, Pa sold inventory that it had purchased for $80,000 to Son for $100,000. 30% of the inventory was resold by Son by December 31, year 6.

7. On April 1, year 6, PA sold machinery to Son for $40,000. The carrying value of the machinery at that date of sale was $48,000. The remaining useful life of the machinery on that date was 4 years.

8. On January, year 4, Son sold a building to Pa for $60,000. Son had Purchased the building on January 1, year 1 for $80,000 and it had an estimated 8 year life on that date with no salvage value.

9. On May 1, year 6, Son borrowed $10,000 from Pa. the one-year note had interest rate of 6%. Both the principal and interest was payable at maturity.

Required

1. a) Prepare the calculation and allocation of AD schedule and the AD amortization and goodwill impairment schedule.

b) Prepare the intercompany profits, gains and losses schedule.

c) Calculate the consolidated net income for year 6

d) Calculate the consolidated retained earnings at Jan. 1, Year 6.

e) Prepare in good form the following for year 6:

· Consolidated income statement

· Consolidated retained earnings statement

· Consolidated balance sheet

2. Prepare the paper eliminating journal entries for the inter-company sale of the machinery in Year 6.