Advanced Financial Accounting Part IFall

Lesson FourSolutions

Page No. 1

Problem 2 Chapter 7
Equipment gain Before Tax Year 2 sale Sally selling * Depreciation Years 2 and 3 (3,000 2) Balance December 31, Year 3 Depreciation Year 4 Balance December 31, Year 4 15,000 6,000 9,000 3,000 6,000 40% tax After tax

3,600 1,200 2,400 (b)

5,400 1,800 (a) 3,600

* Assuming the sale took place at the beginning of Year 2 (a) Calculation of consolidated profit Year 4 Profit of Peggy Profit of Sally Add: Equipment gain realized Adjusted profit Consolidated profit Attributable to: Shareholders of Peggy NCI (25% x 54,800) 185,000 (a) 53,000 1,800 54,800 (c) 239,800 226,100 13,700 239,800 (b) Peggy Company Consolidated Income Statement Year 4 Revenues (580,000 + 270,000) Miscellaneous expense (110,000 + 85,000) Depreciation expense (162,000 + 97,000 - (a) 3,000) Income tax expense (123,000 + 35,000 + (a) 1,200) Total expenses Consolidated profit Attributable to: Shareholders of Peggy NCI (25% x 54,800) $850,000 195,000 256,000 159,200 610,200 239,800 226,100 13,700 239,800 (c) Deferred income taxes - December 31, Year 4 (b) 2,400

All solutions are either 2010 McGraw-Hill Ryerson Limited. or ASCA all rights reserved

Advanced Financial Accounting Part IFall

Lesson FourSolutions

Page No. 2

Problem 6 Chapter 7
Acquisition differential buildings Yearly amortization (25,000 / 20) Intercompany revenues and expenses Interest revenue and expense (12,000 ) Rental revenue and administrative expense Sales and purchases Intercompany profits Before tax Land gain M selling realized in Year 6 Opening inventory K selling Ending inventory K selling Machinery gain M selling realized by depreciation in Year 6 (13,000 / 5) 10,000 12,000 5,000 40% tax 4,000 4,800 2,000 After tax 6,000 (e) 7,200 (f) 3,000 (g) 6,000 (b) 50,000 (c) 90,000 (d) 1,250 (a)

2,600

1,040

1,560 (h)

Calculation of non-controlling interest in profit of K Company Year 6 Income of K Add: profit in opening inventory Less: Amortization of acquisition differential Profit in ending inventory (f) (a) (g) 25,500 7,200 32,700 1,250 3,000 28,450 20% 5,690 (i)

Adjusted profit Non-controlling interests share Non-controlling interest, Year 6

All solutions are either 2010 McGraw-Hill Ryerson Limited. or ASCA all rights reserved

Advanced Financial Accounting Part IFall

Lesson FourSolutions

Page No. 3

M Co. Consolidated Income Statement Year 6 Sales (600,000 + 350,000 (d) 90,000) Interest revenue (6,700 (b) 6,000) Gain on land sale (8,000 + (e) 10,000) Total revenues Cost of goods sold (334,000 + 225,000 (d) 90,000 (f) 12,000 + (g) 5,000) Distribution expense (80,000 + 70,000 (h) 2,600 + (a) 1,250) Administrative expense (147,000 + 74,000 (c) 50,000) Interest expense (1,700 + 6,000 (b) 6,000) Income tax expense (20,700 + 7,500 + (e) 4,000 + (f) 4,800 (g) 2,000 + (h) 1,040) Total expenses Profit Attributable to: Shareholders of M Non-controlling interest $860,000 700 18,000 878,700 462,000 148,650 171,000 1,700 36,040 819,390 59,310 53,620 5,690 $ 59,310

(i)

All solutions are either 2010 McGraw-Hill Ryerson Limited. or ASCA all rights reserved

Advanced Financial Accounting Part IFall

Lesson FourSolutions

Page No. 4

Problem 17 - Chapter 7
Calculation, allocation, and amortization of acquisition differential Cost of 70% investment in Dandy Implied value of 100% Carrying amounts of Dandys net assets: Common shares Retained earnings Total shareholders' equity Acquisition differential, Jan. 1, Year 1 Allocation: Inventory Equipment Balance Goodwill Amortization Inventory Equipment (10 year life) Goodwill Balance Jan. 1/1 100 500 4,650 5,250 Intercompany profits Before tax Opening inventory Dandy selling (2,000 x 40%) Closing inventory Dandy selling (2,500 x 40%) Equipment Jan. 1/2 Handy selling Depreciation to Dec. 31, Year 5 ([200 / 8] 4) Balance, Dec. 31, Year 5 Depreciation Year 6 (200 / 8) Balance, Dec. 31, Year 6 800 1,000 200 (f) 100 100 25 75 40 10 30 60(g) 15(h) 45(i) 40% tax 320 400 After tax 480 (d) 600(e) Years 1 to 5 100 250 3,550 3,900 Year 6 50 70 120 Balance Dec. 31/6 200 (a) 1,030 (b) 1,230 (c) FV BV 100 500 7,000 10,000 250 4,500 4,750 5,250

600 4,650

Intercompany revenues and expenses, receivables and payables Sales and purchases Consulting revenues and expenses (50 x 12) Deferred income taxes (Dec. 31, Year 6) Inventory Equipment (e) (i) 400 30 430(l) 5,000(j) 600(k)

All solutions are either 2010 McGraw-Hill Ryerson Limited. or ASCA all rights reserved

Advanced Financial Accounting Part IFall

Lesson FourSolutions

Page No. 5

Calculation of consolidated net income Year 6 Income of Handy Less: Dividends from Dandy (800 70%) Add: Realized gain on equipment Adjusted net income Income of Dandy Add: Opening inventory profit Less: Amortization of acquisition differential Closing inventory profit Adjusted net income Consolidated net income Attributable to: Shareholders of Handy NCI (30% x 780) (d) (c) (e) 1,020 480 (120) (600) (m) (h) 1,760 560 1,200 15 1,215

780 1,995 1,761 234 1,995

(a)

Handy Company Consolidated Income Statement Year 6 24,340 13,280 11,060 460 (1,285) (6,830) 3,405 1,410 1,995 1,761 234 1,995

Sales (21,900 + 7,440 (j) 5,000) Cost of sales (14,800 + 3,280 (j) 5,000 + (e) 1,000 (d) 800) Gross profit Other revenue (1,620 + 0 (m) 560 (k) 600) Selling & admin expense (840 + 420 + (a) 50 (h) 25) Other expenses (5,320 + 2,040 + (b) 70 (k) 600) Income before income taxes Income tax expense (800 + 680 + (d) 320 (e) 400 + (h) 10) Net income Attributable to: Shareholders of Handy NCI (30% x 780)

All solutions are either 2010 McGraw-Hill Ryerson Limited. or ASCA all rights reserved

Advanced Financial Accounting Part IFall

Lesson FourSolutions

Page No. 6

Calculation of consolidated retained earnings Jan. 1, Year 6

Handys retained earnings Unrealized gain on sale of equipment net of tax Subtotal Dandys retained earnings, beginning of Year 6 Dandys retained earnings, at acquisition Change in retained earnings since acquisition Cumulative differential amortization and impairment Profit in beginning inventory net of tax Handys share @ 70% Consolidated retained earnings (b) Handy Company Consolidated Statement of Retained Earnings For the year ended December 31, Year 6 7,780 1,761 9,541 (1,600) 7,941 $5,180 4,500 680 (3,900) (480) - 3,700 - 2,590 7,780 (g) 10,420 (60) 10,360

(c) (d)

Retained earnings, beginning of year Net income Dividends paid Retained earnings, end of year

(c) When unrealized profit is eliminated from the carrying value of the equipment, the equipment ends up being reported at the original cost of the equipment less accumulated amortization based on the original cost, as if the intercompany transaction had never taken place. So, in effect, the equipment is reported at its historical cost.

(d) Goodwill impairment loss under entity theory Less: NCIs share (30%) Goodwill impairment loss under parent company extension theory NCI on income statement under entity theory Add: NCIs share of goodwill impairment (30%) NCI on income statement under parent company extension theory

70 21 49 234 21 255 (CGA-Canada adapted)

All solutions are either 2010 McGraw-Hill Ryerson Limited. or ASCA all rights reserved