Exam 4: Wholly-Owned Subsidiaries: Reporting Subsequent to Acquisition

DC Company purchased 100% of the outstanding common shares of FA Company on December 31,20X3 for $170,000.At that date,FA had $100,000 of outstanding common stock and retained earnings of $30,000.It was agreed that the net assets were fairly valued except that the fair value of the capital assets exceeded their net book value by $20,000 and the carrying value of the inventory exceeded its fair value by $10,000.The capital assets had a remaining useful life of eight years as of the acquisition date and have no salvage value.Inventory turns over four times a year.What adjustment should be made to the consolidated financial statements for the year ended December 31,20X4 for the difference in inventory valuation?

What does "one-line consolidation" refer to?

Which of the following consolidation adjustments will be required for a subsidiary that was acquired as a going concern,but will not be applicable for a parent-founded subsidiary?

On September 1,20X5,CanAir Limited decided to buy 100% of the shares outstanding of SkyAir Inc.for $900,000.Can Air will pay for this acquisition by using cash of $500,000 and issuing share capital for the remaining amount.The balances showing on the statement of financial position for the two companies at August 31,20X5 are as follows: After a review of the financial assets and liabilities,CanAir determines that some of the assets of SkyAir have fair values different from their carrying values.These items are listed below: • Land has a fair value of 225,000 • The building has a fair value of 1,090,000.The remaining useful life of the building is 20 years. • Internet domain name has a fair value is $55,000.The domain name is estimated to have a useful life of 5 years. • Customer lists has a fair value is $35,000.It is estimated that the customer lists will have a useful life of 7 years. During the 20X9 fiscal year,the following events occurred: 1.On March 1,20X9,SkyAir sold land to CanAir for $390,000,which had a carrying value of $275,000.Can Air paid for this with $90,000 cash and a note payable for the difference.This note pays interest at 10% which is paid monthly. 2.CanAir provided management expertise to SkyAir and charged management fees of $890,000. 3.CanAir sold supplies (included in CanAir sales)to SkyAir for $200,000.CanAir charged SkyAir an amount that was 25% above costs.SkyAir still has supplies on hand of $70,000. 4.In 20X8,SkyAir had provided seat space on flights to Can Air for a value of $500,000.This amount was included in sales for SkyAir.Profit margin on these sales is 40%.At the end of August,20X8,CanAir still had an amount of $200,000 in these prepaid seats that had not yet been used.(CanAir includes this in inventory. ) Statements of Financial Position As at August 31,20X9 Statements of Comprehensive Income For the year ended August 31,20X9 Required: Prepare the consolidated Statement of Comprehensive Income for the year ended August 31,20X9.

On December 31,20X1,the Dad Ltd.purchased 100% of the outstanding common shares of the Sad Ltd.for $9.5 million in cash.On that date,the shareholders' equity of Sad totaled $8 million and consisted of $1 million in no par common shares and $7 million in retained earnings.Both companies use the straight-line method to calculate depreciation.Goodwill,if any arises as a result of this business combination,is written down if there is a permanent impairment in its value. For the year ending December 31,20X6,the statements of comprehensive income for Dad and Sad were as follows: As at December 31,20X6,the condensed statements of financial position for the two companies were as follows: OTHER INFORMATION: 1.On December 31,20X1,Sad had a building with a fair value that was $300,000 greater than its carrying value.The building had an estimated remaining useful life of 20 years. 2.On December 31,20X1,Sad had inventory with a fair value that was $200,000 less than its carrying value.This inventory was sold in 20X3. 3.During 20X6,Dad sold merchandise to Sad for $100,000,a price that includes a gross profit of $40,000.During 20X6,40% of this merchandise was resold by Sad to third parties and the other 60% remains in its December 31,20X6 inventories.On December 31,20X5,the inventories of Sad contained merchandise purchased from Dad on which Dad had recognized a gross profit in the amount of $20,000. 4.During 20X6,Dad declared and paid dividends of $300,000 while Sad declared and paid dividends of $100,000. 5.Dad accounts for its investment in Sad using the cost method. 6.The retained earnings of Dad as at December 31,20x5 was $12,000,000.On that date,Sad had retained earnings of $9,800,000.Sad has not issued any common shares since its acquisition by Dad. 7.There were no specific events or circumstances between 20X2 and 20X6 to indicate any impairment of goodwill. The retained earnings of Dad as at December 31,20X5 equalled $12,000,000.On that date,Sad had retained earnings of $9,800,000.Sad has not issued any common shares since its acquisition by Dad. Required: Calculate the consolidated retained earnings at December 31,20X6.

In consolidating a wholly-owned parent-founded subsidiary,which of the following adjustments or eliminations is not required?

On December 31,20X1,Dad Ltd.purchased 100% of the outstanding common shares of the Sad Ltd.for $9.5 million in cash.On that date,the shareholders' equity of Sad totaled $8 million and consisted of $1 million in no par common shares and $7 million in retained earnings.Both companies use the straight-line method to calculate depreciation.Goodwill,if any arises as a result of this business combination,is written down when there is impairment.Both Dad and Sad report under accounting standards for private enterprises. For the year ending December 31,20X6,the statements of earnings for Dad and Sad were as follows: As at December 31,20X6,the condensed statements of financial position for the two companies were as follows: OTHER INFORMATION: 1.On December 31,20X1,Sad had a building with a fair value that was $300,000 greater than its carrying value.The building had an estimated remaining useful life of 20 years. 2.On December 31,20X1,Sad had inventory with a fair value that was $200,000 less than its carrying value.This inventory was sold in 20X3. 3.During 20X6,Dad sold merchandise to Sad for $100,000,a price that includes a gross profit of $40,000.During 20X6,40% of this merchandise was resold by Sad to third parties and the other 60% remains in its December 31,20X6 inventories.On December 31,20X5,the inventories of Sad contained merchandise purchased from Dad on which Dad had recognized a gross profit in the amount of $20,000. 4.During 20X6,Dad declared and paid dividends of $300,000 while Sad declared and paid dividends of $100,000. 5.Dad accounts for its investment in Sad using the cost method. 6.The retained earnings of Dad as at December 31,20x5 was $12,000,000.On that date,Sad had retained earnings of $9,800,000.Sad has not issued any common shares since its acquisition by Dad. 7.There were no specific events or circumstances between 20X2 and 20X6 to indicate any impairment of goodwill. Required: Calculate consolidated net income for the year ending December 31,20X6.

Amber Ltd.acquired Luna Ltd.in a business combination.One of the main reasons for the acquisition is that Amber wanted access to Luna's extensive customer list.The list is not recorded on Luna's books and has an estimated value of $100,000 and an estimated life of 7 years.On Amber's consolidated statement of financial position,what value should be shown for Luna's customer list?

On December 31,20X5,Space Co.purchased 100% of the outstanding common shares of Shuttle Ltd.for $1,200,000 in shares and $200,000 in cash.The statements of financial position of Space and Shuttle immediately before the acquisition and issuance of the notes payable were as follows (in 000s): The difference in the carrying value and the fair value of the capital assets for Shuttle relates to its office building.This building was originally purchased by Shuttle in January,20X1 and is being depreciated over 30 years. During 20X6,the year following the acquisition,the following occurred: 1.Shuttle borrowed $350,000 from Space on June 1,20X6,and was charged interest at 10% per annum,which it paid on a monthly basis.There were no repayments of principal made during the remaining of the year. 2.Throughout the year,Shuttle purchased merchandise of $800,000 from Space.Space's gross margin is 30% of selling price.At December 31,20X6,Shuttle still owed Space $250,000 on this merchandise.75% of this merchandise was resold by Shuttle prior to December 31,20X6. 3.Shuttle paid dividends of $250,000 at the end of 20X6 and Space paid dividends of $500,000. During 20X7,the following occurred: 1.Shuttle paid $150,000 on the loan payable to Space on May 30,20X7. 2.Throughout the year,Shuttle purchased merchandise of $1,000,000 from Space.Space's gross margin is 30% of selling price.At December 31,20X6,Shuttle still owed Space $150,000 on this merchandise.85% of this merchandise was resold by Shuttle prior to December 31,20X7. 3.Shuttle paid dividends of $250,000 at the end of 20X7 and Space paid dividends of $500,000. Required: Prepare the consolidated statement of comprehensive income for the year ended December 31,20X7 for Space.

Paranich Co.acquired Crowley Co.in a business combination at December 31,20X4.Crowley has a capital asset that it has been amortizing at a rate of $10,000 per year.At the time of the acquisition,the asset had a book value of $70,000 and a fair value of $77,000.The asset has a remaining life of 7 years.With respect to this asset,how much amortization expense should Paranich report on its December 31,20X5 consolidated financial statements?

Under the direct method,what values should be entered for the assets,liabilities,and shareholders' equity to start the consolidation process?

On September 1,20X5,CanAir Limited decided to buy 100% of the shares outstanding of SkyAir Inc.for $900,000.Can Air will pay for this acquisition by using cash of $500,000 and issuing share capital for the remaining amount.The balances showing on the statement of financial position for the two companies at August 31,20X5 are as follows: After a review of the financial assets and liabilities,CanAir determines that some of the assets of SkyAir have fair values different from their carrying values.These items are listed below: • Land has a fair value of 225,000 • The building has a fair value of 1,090,000.The remaining useful life of the building is 20 years. • Internet domain name has a fair value is $55,000.The domain name is estimated to have a useful life of 5 years. • Customer lists has a fair value is $35,000.It is estimated that the customer lists will have a useful life of 7 years. During the 20X9 fiscal year,the following events occurred: 1.On March 1,20X9,SkyAir sold land to CanAir for $390,000,which had a carrying value of $275,000.Can Air paid for this with $90,000 cash and a note payable for the difference.This note pays interest at 10% which is paid monthly. 2.CanAir provided management expertise to SkyAir and charged management fees of $890,000. 3.CanAir sold supplies (included in CanAir sales)to SkyAir for $200,000.CanAir charged SkyAir an amount that was 25% above costs.SkyAir still has supplies on hand of $70,000. 4.In 20X8,SkyAir had provided seat space on flights to Can Air for a value of $500,000.This amount was included in sales for SkyAir.Profit margin on these sales is 40%.At the end of August,20X8,CanAir still had an amount of $200,000 in these prepaid seats that had not yet been used.(CanAir includes this in inventory. ) Statements of Financial Position As at August 31,20X9 Statements of Comprehensive Income For the year ended August 31,20X9 Required: Calculate the consolidated retained earnings as at August 31,20X9. Prepare the consolidated Statement of Financial Position for the year ended August 31,20X9.

A subsidiary sold goods to its parent company.At its year-end,the parent company still had some of the goods in inventory.Included in the value of these inventories is $15,000 of unrealized profits.What journal entry should be made to eliminate these unrealized profits?

On the date that a company acquires a subsidiary,which consolidated financial statement(s)must be prepared?

Inventory was acquired as part of a business combination at the end of 20X1.The inventory was sold in 20X2.How should the fair value increment for the inventory at acquisition be treated for consolidation at the end of 20X2?

The goodwill impairment test does not involve ________.

On January 1,20X3,Dwayne Ltd.formed Carlos Co. ,a 100% owned subsidiary.During 20X6,Dwayne sold Carlos $100,000 in goods.The unrealized profit in Carlos' inventories was $20,000 at December 31,20X5 and $25,000 at December 31,20X6.Ignoring income taxes,what adjustment should be made to the consolidated financial statements for the year ended December 31,20X6 to reflect the unrealized profit in Carlos' ending inventory?

Waite Co.is a subsidiary of Star Ltd.During the year,Waite earned net income of $65,000.Star recorded this income on its books using the equity method.What elimination entry does Star have to make in the consolidation process with respect to this income?

Mitzy's Muffins Ltd.purchased a commercial baking system for $150,000 at the beginning of 20X1.The estimated economic life of the system is 10 years and Mitzy's uses straight-line amortization.At the beginning of 20X3,Delicious Bakeries Ltd.acquired Mitzi's in a business combination.At the time of acquisition,Mitzi's baking system had a fair value of $140,000.At the end of 20X3,how much amortization expense should Mitzi report?

In consolidating parent-founded subsidiaries,what account is used to offset the parent company's "Investment in Subsidiary" account?