consolidation

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 Swag’s 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
Perk’s outstanding shares. The fair value of the Swag shares
was $14,000,000.

c) In exchange for all of Perk’s 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 Tower’s 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 Tower’s acquisition, Blue Loft’s 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, March’s shareholders’ equity consisted of the following:

Common shares $720,000
Retained earnings 360,000

The only acquisition differential pertained to goodwill.

Cox’s “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 March’s profit for 20X8.

c) Calculate the non-controlling interest amounts for Cox’s 20X9

i. consolidated income statement, and

ii. consolidated balance sheet.

d) Calculate the amount of goodwill that should appear on Cox’s 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:
  
  Aster’s shareholders’ equity consisted of the following:
  
  Common shares $375,000
  Retained earnings 693,750
  
  
  
  
  
  
  
  Fair value of Aster’s 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, Aster’s inventory included $25,000 of goods purchased from Peony. Peony’s gross margin on the sale was 40%. The goods were sold to third parties in 20X6.
  
  
• At December 31, 20X5, Peony’s inventory included $125,000 of goods purchased from Aster. Aster’s 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. Peony’s gross margin on the sale was 40%. At December 31, 20X6, $50,000 of the goods are still in Aster’s inventory.
  
  

• During 20X6, Aster sold goods to Peony for $875,000. Aster’s gross margin on the sale was 40%. At December 31, 20X6, $87,500 of the goods are still in Peony’s 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, Tyme’s shareholders’ equity consisted of the following:

Common shares $1,600,000
Retained earnings 800,000

At the time of acquisition, the carrying values of Tyme’s 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 Tyme’s
  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 Chee’s
  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 Chee’s 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, Nye’s shareholders’ equity consisted of the following:

Common shares $350,000

Retained earnings 875,000

At the time of acquisition, all of Nye’s 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, Jong’s inventory included $350,000 of goods purchased from Nye. Nye’s 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: