Assignment #2

Question 1
Student notes mind map
Parent Company Pepper Ltd
o Parent sold $97,500 to Subsidiary (downstream)
COGS - $65,000, 50% remaining inventory
Intercompany profit = 97,500-65,000 =32,500
Subsidiary = Salt Ltd.
o Common Share $300,000
o Retained Earning $1,280,000
o Subsidiary sold $45,000 to parent
Gross profit 40%, 20% remaining
Purchased 75% of company for $1,275,000
Tax Rate = 30%
$2,000 Impairment for goodwill

1.a) Calculate Goodwill using fair value (Calculation 1 Preliminary Goodwill)

75% cost of subsidiary $1,275,000

100% cost of implied subsidiary 1,700,000
Fair Value of Assets 1,905,000
Fair Value of Liability 255,000
Fair value of Net Assets 1,650,000
Goodwill Balance $50,000

1.b) Calculate Goodwill using Acquisition Differential (Calculation 2.a Goodwill)

75% cost of subsidiary $1,275,000

100% cost of implied subsidiary 1,700,000
Book value of Subsidiary (Shareholder equity)
Common Share 300,000
Retained Earning 1,280,000 1,580,000
Acquisition Differential 120,000
Allocated:
Capital Assets 70,000 dr
Goodwill Balance $50,000
NCI (25%*1,700,000) 425,000
Calculation 2.b Amortization Table
Accounts Allocation Balance During 2015 Balance
January 1, 2015 December 31,
2015
Capital Assets (10) 70,000 dr 7,000 dr 63,000
Goodwill 50,000 dr 2,000 dr 48,000
Total 120,000 dr 9,000 dr 111,000 dr
NCI 25% 30,000 2,250 27,750

1.C) Unrealized inventory profit before & after tax

Intercompany Sales & Purchase

Sales and Purchase (Downstream) Pepper to Salt - $97,500 (COGS/Sales)
Sales and Purchase (Upstream) Salt to pepper - $45,000 (COGS/Sales)

Intercompany unrealized profits:

Pepper sold $97,500 to Salt (downstream transaction), COGS is $65,000;

intercompany profit is $32,500 while unrealized is 50% of intercompany profit for a
total of $16,250 before tax.

Salt sold Pepper (upstream) $45,000 of inventory earning a gross intercompany

profit of 40% of inventory while unrealized inventory remaining is 20%. Therefore
$3,600 of intercompany profit is unrealized for salt.

Unrealized Profits Before Tax Tax 30% After Tax

(COGS)
Unrealized $16,250 $4,875 $11,375
Downstream (Parent)
($32,500*50%)
Unrealized Upstream $3,600 $1,080 $2,520
(Subsidiary)
($45,000*40%*20%)
Total $19,850 $5,955 $13,895
1.D) Consolidated net income
Net Income of Pepper $270,500
Less: Salts Dividends ($80,000*75%) (60,000)
Less: Unrealized Inventory (Downstream) (11,375) (71,375)
Adjusted pepper net income 199,125

Net income of Salt 147,000

Less: Unrealized inventory (upstream) (2,520)
Less: Amortization of acquisition differential (9,000) (11,520)
for 2015
Adjusted salt net income 135,480
Total Consolidated net income $334,605

Consolidated net income attributed to $300,735

peppers shareholder
Non-controlling interest ($135,480 * 25%) $33,870

Consolidated Retained earnings proof

Parents retained earning, dec 31, year 2015 $2,580,000
Less: Unrealized profit (Downstream) (11,375)
Sub retained earning 1,347,000
Retained earnings at acquisition 1,280,000
Change in acquisition 67,000
Less: Unrealized profit (upstream) (2,520)
Less: Cumulative amortized of ADA (9,000)
Realized retained earnings since ADA 55,480
Parents % 75% 41,610
Consolidated Retained Earnings $2,610,235
Calculation of NCI Dec 31, 2015
Common Shares 300,000
Retained Earnings 1,347,000
Total Shareholders Equity, dec 31 2015 1,647,000
Less: Unrealized inventory profit (Upstream) (2,520)
Adjusted Shareholders Equity 1,644,480
Non-controlling interests share 25%
411,120
Add NCIs Share of unamortized 27,750
Non-controlling interest 438,870

Pepper Consolidated Income statement for the year ended

Dec 31, year 2015

Sales (3,750,000+980,000-97,500-45,000) 4,587,500

Cost of goods sold (2,500,000+392,000-97,500- 2,769,350
45000+3,600+16,250)

Gross Profit 1,818,150

Other Expenses (755,000+328,000+2,000) 1,085,000
Interest on long-term debt (90,000) 90,000
Depreciation (70,000+50,000+7,000)(capital assets)) 127,000
Other income ($60,000-60,000dividend) (120,000)
Total Expenses 1,242,000
Net Income before taxes 516,150
Income Tax (124,500+63,000-4,875-1,080) 181,545
Net Income $334,605

Attributed to:
Peppers Shareholder 300,735
Non-controlling interest 33,870
 Pepper
Consolidated Statement of Retained earnings,
For the year ended Dec 31, 2015
Retained Earning, January 1 2,459,500
Add: Net Income 300,735
Less: Dividends Paid $150,000
Retained Earnings, Dec 31 2,610,235

Pepper consolidated Balance Sheet, December 31, year 2015

Cash (90,000+160,000) 250,000
Accounts Receivable (350,000+410,000) 760,000
Inventory (420,000+564,000 -3,600-16,250) 964,150
Capital Assets (2,075,000+950,000+63,000) 3,088,000
Goodwill 48,000
Deferred Income Taxes (4,875+1,080) 5,955
Total Assets 5,116,105
Accounts Payable (55,000+377,000) 432,000
Income Tax Payable 135,000
Long-term debt (900,000) 900,000
Common Share 600,000
Retained Earning 2,610,235
Non-controlling interest 438,870
Total Liability & Shareholder Equity 5,116,105

Question 2 Problem 6-14

Student Notes/Mind Map

Parent Company Vine
Subsidiary Devine
Purchases 75% of company (60,000/80,000) for $75*60,000 = $4,800,000
Ordinary Share @ acquisition date = $3,500,000
Retained earning @ acquisition date = $2,100,000
Inventory/land/equipment/patent/long-term liability and accumulated
depreciation*
10 years on equipment, 5 years on patent
No impairment losses for goodwill
Intercompany Transactions
o Sales from Parent to Subsidiary; 1,000,000 (Year 4), $2,000,000
(year5)
 o Gross Margin from parent to subsidiary = 33.3%
o Subsidiary inventory from parent - $300,000 (year 4), (600,000) (year
5) (upstream)
o Sales from Subsidiary to parent - $800,000 (year 4), $1,200,000 (year
5)
o Subsidiary gross profit margin 40%
o Parents inventory from subsidiary - $100,000 (year 4); $500,000
(Year 5) (downstream)
o Advance to subsidiary 200,000
o Dividends - $500,000*75% = $375,000 (Entity)

Question 14.A)
Acquisition cost Allocation
Acquisition January 1, year 1

Cost of 75% Investment of Devine $4,800,000 [60,000 shares*$80]

Implied cost of 100% of Investment 6,400,000 [4,800,000/75%]
Carrying amount of Devines net assets
Common Shares $3,500,000
Retained Earnings $2,100,000
Total Shareholder Equity 5,600,0000
Acquisition Differential $800,000
Allocation Cost:
Inventory 100,000 cr
Land 200,000 dr
Equipment 200,000 cr
Patent 400,000 dr
 Long-term liability 100,000 cr
$200,000 dr
Balance Goodwill $600,000
Non-controlling interest [25%*6,4000,000] = $1,600,000

Step 2 Create an amortization table (ADA)

Amortization Table
Accounts Allocation Balance Year 1 Year 4 Year 5 Balance
December 31, year 5
Inventory (1) 100,000 Cr 100,000 cr 0 0
Land 200,000 dr 0 0 200,000 dr
Equipment 200,000 cr 80,000 cr 20,000 cr 100,000 cr
(10)
Patent (5) 400,000 dr 320,000 dr 80,000 dr 0
Long-Term 100,000 cr 100,000 cr 0 0
Liability (4)
Goodwill 600,000 dr 0 0 600,000 dr
Total 800,000 dr 40,000 dr 60,000 dr 700,000 dr

Calculation shown below.

Asset & Liability Life: Inventory: 1 year, Equipment: 10 ears; Patent 5 years, Long-
term liability 4 years.
Equipment = $200,000/10 years = $20,000 per year
Patent = $400,000/5 years = $80,000 per year
Long-term Liability = $100,000 = $25,000 per year
Goodwill = N/A

Step 3 Intercompany Transactions

Intercompany Revenue & Expense
Sales & Purchase
Parents Selling $2,000,000
Subsidiary Selling $1,2000,00 $3,200,000 (a)
Advance from Parents to Subsidiary: $200,000 (b)
Dividends: [$500,000*75%] $375,000 (c)

Intercompany Profit

Inventory before tax.

Parents Inventory Year 4 Open 100,000*40% = $40,000[upstream]
Subsidiarys Inventory, year 4 open 300,000*33.3% = $100,000[downstream]
Parents Inventory, Closing year 5 500,000*40% =$200,000[upstream]
Subsidarys Inventory, Closing year 5 600,000*33.3% = $200,00[downstream]

Before Tax Tax 40% After Tax

Land: Upstream $400,000 (d) $160,000 $240,000

Unrealized Profit on Inventory

Unrealized Profits Before Tax Tax 40% After Tax
(COGS)
Opening Upstream 40,000 16,000 24,000
Opening- Downstream 100,000 40,000 60,000
140,000 56,000 84,000
Ending Upstream 200,000 80,000 120,000
Ending - Downstream 200,000 80,000 120,000
400,000 160,000 240,000

B) Consolidated Income Statement

For the year ended, December 31, Year 5
Sales $11,400,000
Dividend, investment income, and gains 625,000
Total Income $12,025,000

Cost of goods sold $6,560,000

Other expenses 860,000
Income Tax Expense 436,000
Total Expenses $7,856,000
Profit $4,169,000

Attributable to:
Shareholders of Vine 3,768,000
Non-controlling interest 401,000
$4,169,000
Notes:
Sales = $11,600,000 + $3,000,000 - $3,200,000(a) = $11,400,000
Sales = (Parents + Subsidiary (a))
Dividends& investment income = ($400,000 + $1,000,000 - $375,000(c) 400,000)
= $625,000
Dividends & investment income = (Parents + Subsidiary (c) (d))
Cost of goods Sold = $8,000,000+1,500,000-3,200,000(a)-140,00+400,000)=
$6,560,000 *From Unrealized profit before tax
Costs of Goods Sold = (Parents + Subsidiary (a) opening inventory + ending
inventory)
Other Expenses = $500,000+300,000-20,000+80,000 = $860,000
Other Expense = (Parents + Subsidiary equipment + patent)
Income Tax expense = $500,000+200,000+56,000-160,000 = $436,000
Income tax expense = (Parents + Subsidiary + 56,00 160,000)
Non-controlling interest = (2,000,000-240,000-120,000-60,000+24,000)*25% =
401,000
Non-controlling interest = [(Subsidiarys net income After tax of land (upstream)
ending inventory (upstream) + Open Inventory (upstream)] * 25% non-controlling
share.

C)
Consolidated Retained Earnings Schedule

Parent retained earnings at December 31, year 5 $12,000,000

Less: Unrealized profit, ending inventory (parent) (120,000)
Subsidairys retained earning at December 31, year 5 $7,000,000
Retained earning at Acquisition 2,100,000
Change in acquisition 4,900,000
Less: unrealized profit, ending inventory (sub) (120,000)
Less: Unrealized profit, land (240,000)
Less Cumulative amortization of acquisition differential (100,000)
Retained earnings since acquisition 4,440,000
Parents Share % 75% $3,330,000
Consolidated retained earning $15,210,000

D) Consolidated Statement of Financial Position

December 31, Year 5
Assets
Inventories $6,600,000
Plants & Equipment $29,900,000
Cash & Current receivables $1,200,000
Land $8,300,000
Goodwill $600,000
Accumulated Depreciation -$10,200,000
Deferred Income tax $320,000
Total Assets $36,720,000

Equity & Liability

Ordinary Shares $10,000,000
Retained Earning $15,210,000
Non-controlling Interest $2,710,000
Current liability $800,000
Long-term liability $7,700,000
Deferred income taxes $300,000
Total Liability & Equity $36,720,000

Calculation:
Inventory = Parents + Subsidiary Closing inventory (Subsidiary + Parents)
= 4,600,000+2,400,000-400,000
Plant & Equipment = Parents + Subsidiary accumulated depreciation equipment
= 18,800,000+11,800,000-200,000+500,000 = $29,900,000
Cash & Current receivable = Parents + Subsidiary = $900,000+300,000 = $1,200,000
Land = Parents + Subsidiary + Land (Balance ADA) $400,000 (intercompany)
= $6,000,000 + 2,500,000 + 200,000 - $400,000 = $8,300,000
Goodwill = $600,000
Accumulated depreciation = Parents + subsidiary - $500,000(accumulated)-
100,000(equipment) = -10,200,000
Deferred Income tax = $160,000 (land) + after tax ending ($160,000) = $320,000
Ordinary Share = Given, $10,000,0000
Retained earning = Calculated in part C, $15,210,000
Long term liability = (Parents + Subsidiary) = $6,600,000+1,100,000 = $7,700,000
Current Liability = (Parents + Subsidiary - $200,000k advance) = $800,000