Exam 4: Consolidated Financial Statements Subsequent to Acquisition

Panaz Company acquires the voting stock of Sydney Company for $40,000 in cash on January 1, 2020. Panaz accounts for its investment using the cost method. Sydney's shareholders' equity at the date of acquisition was $2,500, consisting of capital stock of $1,900 and retained earnings of $600. The $37,500 excess of acquisition cost over book value is attributed as follows: Inventories \ 300 FIFO, sold in 2020 Plant \& equipment 2,000 5-year life, straight -line ID intangibles 4,000 4-year life, straight -line Goodwill Impaired by \5 0 in 2021 Total \ 37,500 It is now December 31, 2021. Sydney's retained earnings at the beginning of 2021 was $2,500. Sydney reported net income of $1,800 and declared and paid dividends of $100 in 2021. Required Prepare the eliminating entries (C), (A), (E), (R), and (O), in journal form, necessary to consolidate the financial statements of Panaz and Sydney at December 31, 2021.

When Prestige Inc. acquired Squiggle Technologies, the following previously unreported intangible assets were recognized as part of the acquisition: Intangible Asset Book Value at December 31, 2020 Asset Type Developed product technology \ 750 Indefinite life Royalty agreements 115 Limited life Customer relationships 170 Limited life All limited life intangibles are straight-line amortized over their useful lives, and all intangibles are tested for impairment annually. It is now December 31, 2020, the end of the accounting year. Amortization for 2020 has already been properly recorded. You have the following information regarding these intangibles: Intangible Asset Total Expected Future Net Cash Inflows, Undiscounted Total Expected Future Net Cash Inflows, Discounted Developed product technology \ 800 \ 450 Royalty agreements 130 50 Customer relationships 150 125 Required a. Calculate the impairment loss on each of the intangibles for 2020, following U.S. GAAP. b. Calculate the impairment loss on each of the intangibles for 2020, following IFRS

Premier Industries paid $50,000 for the voting stock of Simon Company, on July 1, 2016, the beginning of the fiscal year. At the date of acquisition, Simon's book value was $15,000, consisting of $3,000 in capital stock, $12,200 in retained earnings, and $200 in accumulated other comprehensive loss. The $35,000 excess of acquisition cost over book value was attributed to $5,000 in indefinite life identifiable intangible assets and $30,000 in goodwill. It is now June 30, 2020. Simon's retained earnings at the beginning of fiscal 2020 was $17,000, and its beginning accumulated other comprehensive loss was $150. Identifiable intangibles impairment to the beginning of fiscal 2020 was $800 and goodwill impairment to the beginning of fiscal 2020 was $600. Identifiable intangibles impairment in fiscal 2020 was $100 and there was no goodwill impairment. Simon declares no dividends. Premier uses the cost method to account for its investment in Simon on its own books. Required Prepare the eliminating entries (A), (E), (R), and (O), in journal form, necessary to consolidate the financial statements of Premier and Simon at June 30, 2020.

At the date of acquisition, a subsidiary's inventory (FIFO, sold in the year of acquisition) is overvalued by $600, its plant assets (10-year life, straight-line) are overvalued by $4,000, and it has previously unreported intangibles valued at $1,000 (2-year life, straight-line). Goodwill from the acquisition is not impaired. In the second year following acquisition, the subsidiary reports net income of $2,000. Using the complete equity method, in the second year the parent reports equity in the net income of the subsidiary of:

The U.S. GAAP option to use a qualitative assessment for impairment testing applies to:

A parent company acquires all of a subsidiary's voting stock at the beginning of 2018. At the date of acquisition, the subsidiary's equipment had a book value of $40 million and a fair value of $15 million. The equipment had a 10-year remaining life, straight-line. Consolidation eliminating entry (O), on the consolidation working paper for 2021, has what effect on consolidated depreciation expense?

When the parent uses the cost method, eliminating entry (A) adjusts the parent's balance sheet accounts to the amounts reported using the complete equity method. Which of the parent's accounts must be adjusted?

Use the following information to answer bellow Questions: Park Corporation acquired the voting stock of Sequoia Company on January 1, 2020 for $25 million in cash and stock. At the date of acquisition, Sequoia's book value totaled $3 million, consisting of $1.6 million in capital stock, $1.8 million in retained earnings, and $400,000 in accumulated other comprehensive losses. Sequoia's reported net assets at the date of acquisition were carried at amounts approximating fair value, except its inventory was overvalued by $500,000 (sold in 2020), its plant assets (10-year life, straight-line) were overvalued by $3,500,000, and its long-term debt (premium amortized over 10 years, straight-line) is undervalued by $100,000. Sequoia also had previously unreported identifiable intangibles (5-year life, straight-line) valued at $5,000,000. It is now December 31, 2020. Sequoia reports net income of $1,200,000 and other comprehensive income of $50,000 for 2020 and declares and pays dividends of $200,000. None of the revaluations are impaired in 2020. Park uses the complete equity method to account for its investment. -How does eliminating entry (O) change consolidated cost of goods sold?

Use the following information to answer Questions bellow. Potash Corporation acquired the voting stock of Safestyle Company on January 1, 2019 for $50 million. Safestyle's book value at the time was $10 million, consisting of $2 million of capital stock and $8 million of retained earnings. The $40 million difference between fair and book value was attributed to goodwill. It is now December 31, 2020, the end of the accounting year and two years after the acquisition. Safestyle's January 1, 2020 retained earnings balance is $11 million, and it reports net income of $1.8 million for 2020. Safestyle declares no dividends and has no other comprehensive income. Goodwill from the acquisition was impaired by $1 million in 2019 and $500,000 in 2020. Potash uses the complete equity method to report its investment in Safestyle on its own books. -What is 2020 equity in net income of Safestyle, reported on Potash's books?

A U.S. company reports $11,600 in goodwill and decides to quantitatively test it for impairment at the end of the year. The following information is collected: Division 1 Division 2 Division 3 Book value of goodwill \ 5,000 \ 400 \ 6,200 Fair value of division 60,000 10,000 25,000 Book value of division 62,000 9,500 24,000 What is the amount of goodwill impairment loss for the year, following U.S. GAAP?

In its acquisition of Spitfire Company on January 1, 2019, Philips Industries identifies the following intangibles belonging to Spitfire but not reported on its books. All are separately capitalized per ASC Topic 805. Fair Value, January 1, 2019 Useful Life Licensing agreements \ 800 5 years, SL Brand names 5,000 Indefinite Customer lists 20,000 4 vears, SL. Philips follows U.S. GAAP and is consolidating Spitfire at December 31, 2021 (3 years after the acquisition). No impairment losses were reported on the licensing agreements or customer lists in 2019 or 2020. An impairment loss of $\$ 1,000$ was reported on the brand names in 2020 . Because expectations regarding future performance have significantly declined, Philips decides to skip the qualitative assessment option, where allowed, and performs a quantitative impairment test for all three intangible assets. On December 31, 2021, the following information is available: Total Expected Future Cash Total Expected Future Cash Intangible Asset Inflows, Undiscounted Inflows, Discounted Licensing agreements \ 350 \ 280 Brand names 3,000 2,500 Customer lists 5,100 4,200 Required a. What is the impairment loss for the identifiable intangibles for 2021, following U.S. GAAP? b. What is the impairment loss for the identifiable intangibles for 2021, following IFRS?

Park Corporation acquired the voting stock of Sun Corporation on January 2, 2021. Sun Corporation's trial balance at the date of acquisition is as follows: Dr (Cr) Cash and receivables \ 400 Inventories 500 Property, plant and equipment, net 4,500 Accounts payable (300) Long-term debt (3,800) Capital stock (1,200) Treasury stock 50 Retained earnings (135) Accumulated other comprehensive income (15) Total An analysis of Sun's assets and liabilities reveals that book values of some reported items do not reflect their fair values at the date of acquisition: •Inventories are undervalued by $300. •Property, plant and equipment is overvalued by $1,000. •Long-term debt is undervalued by $50. The inventories are reported using FIFO, and acquisition-date inventories were sold in 2021. Property, plant and equipment has a 10-year remaining life, straight-line. The long-term debt has an average remaining term of two years, and the premium is straight-line amortized. The following items are not currently reported on Sun's balance sheet: •Favorable lease agreements, valued at $25. •Signed customer contracts for product development, valued at $22. •In-process research and development, valued at $120. •There are lawsuits pending against Sun. The best estimate of likely losses on these lawsuits, at present value, is $7. The in-process research and development is an indefinite life intangible. The lease agreements have limited lives of 5 years, and customer contracts have limited lives of two years, both amortized on a straight-line basis. On January 2, 2021, Park issued stock with a market value of $1,000 for all of the voting stock of Sun. Registration fees in connection with issuing the stock are $100, paid in cash. Consulting, accounting, and legal fees connected with the merger are $250, paid in cash. In addition, Park enters into an earnings contingency agreement, whereby Park will pay the former shareholders of Sun an additional amount if Sun's performance meets certain minimum levels. The present value of the contingency is estimated at $200. It is now December 31, 2021. No impairment occurs in 2021 on the in-process research and development or acquired goodwill. The pending lawsuit value has not changed. The earnings contingency has also not changed in value. Sun reported net income of $500 in 2021, and paid no dividends. Its shareholders' equity at December 31, 2021 is as follows: Shareholders' Equity, December 31, 2021 Capital stock \ 1,200 Treasury stock \{50\} Retained earnings 635 Accumulated other comprehensive income Total \ 1,795 Required a. Calculate Park's acquisition cost for its investment in Sun, and the initial balance for goodwill. b. Calculate equity in net income of Sun for 2021. c. Calculate the December 31, 2021 balance in Investment in Sun, on Park's books. d. Prepare the consolidation working paper eliminating entries for 2021.

Which of the following is a reason why goodwill impairment losses calculated using IFRS are expected to be higher than U.S. GAAP goodwill impairment losses?

On January 2, 2018, Putney Industries acquired all of Steico Corporation's voting stock for $10,000. Steico's book value at the date of acquisition was $6,500. Total goodwill of $2,500 was recognized at the date of acquisition. Steico's reported assets and liabilities had book values that approximated fair value at the date of acquisition, but it had previously unreported customer lists (5-year life, straight-line) valued at $1,000. It is now December 31, 2021, four years after the date of acquisition. Goodwill impairment for the years 2018-2020 totaled $300, and goodwill impairment for 2021 is $50. No impairment losses were reported for the customer lists for any year since acquisition. December 31, 2021 trial balances for Putney and Steico are shown in the consolidation working paper that follows. Putney Dr () Steico Dr () Dr Consol. Dr () Current assets \ 5,000 \ 2,500 Fixed assets, net 49,300 24,920 ID intangibles - -- Investment in Steico 12,770 -- Goodwill - -- Liabilities (22,000) (17,000) Capital stock (15,000) (2,000) Retained earnings, Jan. 1 (27,900) (7,200) , Jan. 1 (600) (400) Sales revenue (25,000) (12,000) Equity in NI-Steico (550) -- Equity in -Steico (20) -- Cost of goods sold 20,000 7,000 Operating expenses 4,000 4,200 Other comprehensive income - (20) Total \0 \0 Required a. Calculate 2021 equity in net income of Steico, reported on Putney's separate books. Putney uses the complete equity method to account for its investment in Steico. b. Fill in the eliminating entries (C), (E), (R), and (O) to consolidate the accounts of the two companies at December 31, 2021, using the consolidation working paper. c. Present Putney's consolidated statement of income and comprehensive income for 2021, and its consolidated balance sheet at December 31, 2021.

When Practime acquired Stratus Technologies on January 1, 2018, the following previously unreported intangible assets were recognized as part of the acquisition: Intangible Asset Fair Value, January 1, 2018 Asset Type Brand names \ 10,000 Indefinite life Royalty agreements 5,000 Limited life, 5 years, SL It is now December 31, 2020, the end of the accounting year, and three years since the acquisition. No impairment has been reported on either of the intangibles in 2018 or 2019. Practime bypasses the qualitative impairment test for all intangibles, where this option is available. You have the following information regarding the identifiable intangibles at December 31, 2020: Intangible asset Total Expected Future Net Cash Inflows, Undiscounted Total Expected Future Net Cash Inflows, Discounted Brand names \ 12,000 \ 9,000 Royalty agreements 2,500 1,800 Required a. Calculate the impairment loss on each of the identifiable intangibles for 2020, following U.S. GAAP. b. Calculate the impairment loss on each of the identifiable intangibles for 2020, following IFRS.

Prairie Inc. pays $25,000 for the voting stock of Straw Inc. on July 1, 2019. Straw's book value at the date of acquisition is $5,600. The following items are reported on StrawA's books at amounts that are different from their fair values: Fair Value - Book value Reporting Method Inventories \ 400 FIFO [so ld in fiscal 2020\} Property, plant \& equipment \{3,000\} 10 -year life, straight-line In-process R\&D 4,000 Indefinite life It is now June 30, 2020, the fiscal year-end for both Prairie and Straw. Straw reported net income of $2,500 and declared and paid dividends of $400 in fiscal 2020. Prairie uses the complete equity method to report its investment on its own books. An impairment test at June 30, 2020 reveals that 10% of the goodwill arising from this acquisition is impaired. Required a. Calculate equity in net income of Straw Inc. for fiscal 2020, reported by Prairie on its own books. b. What is the June 30, 2020 balance for Investment in Straw Inc., reported by Prairie on its own books?

A subsidiary has previously unreported brand names valued at $50 million at the date of acquisition. The brand names have an indefinite life. It is now the end of the second year since acquisition, and you are consolidating the accounts. The subsidiary still owns the brand names. Impairment testing reveals that the brand names were impaired by $5 million in the first year and $7 million in the second year. The amount by which the brand names are recognized in eliminating entry (R) is:

Use the following information to answer bellow Questions: On January 1, 2018, Pearson Company acquired all of Sundisk Company's voting stock for $20,000 in cash. Sundisk's total shareholders' equity at January 1, 2018 was $5,000. Some of Sundisk's assets and liabilities at the date of acquisition had fair values that were different from reported values, as follows: Book Value Fair Value Plant assets, net (10 years, straight-line) \ 15,000 \ 10,000 Identifiable intangibles (indefinite life) 0 9,000 It is now December 31, 2020 (3 years later). Impairment of recognized identifiable intangibles totals $400 for 2018 and 2019, and there is no impairment in 2020. There is no goodwill impairment as of the beginning of 2020, but goodwill impairment for 2020 is $1,200. Pearson uses the complete equity method to account for its investment. December 31, 2020 trial balances for Pearson and Sundisk follow: Pearson Sund isk Dr () Dr () Current assets \ 5,000 \ 2,500 Plant assets, net 28,700 22,000 Identifiable intangibles - - Investment in Sundisk 28,400 - Goodwill - - Liabilities \{20,300\} \{11,000\} Capital stock \{15,000\} \{2,000\} Retained earnings, beginning \{25,000\} \{10,000\} Sales revenue \{25,000\} \{14,000\} Equity in net income of Sundisk \{800\} - Cost of goods sold 20,000 9,000 Operating expenses 4,000 3,500 \0 \0 The following questions relate to consolidation eliminating entries for 2020. -Now assume Pearson uses the cost method to account for its investment in Sundisk. You are doing consolidation eliminating entries at December 31, 2020. Before doing eliminating entries (C), (E), (R), (O), in eliminating entry (A) you must increase Pearson's Investment in Sundisk by:

On consolidated financial statements, where does the subsidiary's accumulated other comprehensive income balance appear?

Pronto Communications acquired the voting stock of Singer Telecom on January 1, 2019. It is now December 31, 2021, three years later. Pronto uses the complete equity method to report its investment in Singer on its own books. Both companies have December 31 year-ends. The following information is available: •Pronto paid $600,000 to acquire Singer. •At the date of acquisition, the book values of all of Singer's reported assets and liabilities approximated fair value. Previously unreported limited-lived identifiable intangibles with a fair value of $50,000 were recognized. These intangibles had an estimated life of 5 years, straight-line. There have been no impairment losses. • Total goodwill impairment losses for 2019 and 2020 totaled $2,000. There is no goodwill impairment for 2021. •The change in Singer's retained earnings from January 1, 2019 to December 31, 2020, was $24,500. •In 2021, Singer reported net income of $11,200 and declared and paid dividends of $400. •Singer does not report any other comprehensive income. Required a. Calculate equity in net income for 2021, reported on Pronto's books. b. Calculate the December 31, 2021 balance in Investment in Singer, reported on Pronto's books.