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

On December 31,20X2,the Pipe Ltd.purchased 100% of the outstanding common shares of the Fitter Ltd.for $10.5 million in cash.On that date,the shareholders' equity of Fitter 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 and amortization.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 income statements for Pipe and Fitter were as follows: OTHER INFORMATION: 1.On December 31,20X2,Fitter had a building with a fair value that was $500,000 greater than its carrying value.The building had an estimated remaining useful life of 20 years. 2.On December 31,20X2,Fitter had trademark that was not reported on its balance sheet,but had a fair value that was $200,000.The trademark is amortized over 10 years. 3.During 20X6,Fitter sold merchandise to Pipe for $100,000,a price that includes a gross profit of $40,000.During 20X6,20% of this merchandise was resold by Pipe and the other 80% remains in its December 31,20X6 inventories.On December 31,20X5,the inventories of Pipe contained merchandise purchased from Fitter on which Fitter had recognized a gross profit in the amount of $50,000. 4.During 20X6,it was determined that the goodwill arising at the date of acquisition was impaired and that an impairment loss of $70,000 should be recorded.No impairment had been charged in earlier years. 5.During 20X6,Pipe declared and paid dividends of $300,000 while Fitter declared and paid dividends of $100,000. 6.Pipe accounts for its investment in Fitter using the cost method. The retained earnings of Pipe as at December 31,20X5 equalled $12,000,000.On that date,Fitter had retained earnings of $9,800,000.Fitter has not issued any common stock since its acquisition by Pipe. Required: Calculate the consolidated retained earnings at December 31,20X5 and December 31,20X6.Prepare the consolidated statement of changes equity-partial statement showing the change in retained earnings for December 31,20X6 for Pipe.

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.It is now 20X6 and DC has been very pleased with how profitable its investment in FA has been.On DC's consolidated financial statements at December 31,20X6,what balance should be reported for goodwill?

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 31,20X6 for the fair value increment related to the capital assets?

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 the acquisition,Mitzi's baking system had a fair value of $140,000.With respect to the baking system,how much amortization expense should Delicious Bakeries report on its consolidated financial statements at the end of 20X3?

A company has a subsidiary that has an intangible capital asset.It has not been recorded on the subsidiary's books,but at the date of acquisition,the asset had a fair value of $200,000 and an indefinite economic life.How should the company show the asset on its consolidated statement of financial position?

A parent company can record an investment in its subsidiary under either the cost or equity method.Which of the following statements about consolidated net income is true?

DIY Ltd.owns 20 subsidiary companies.Most of the subsidiaries are hardware stores operating in rural areas.One of the subsidiaries has been having financial difficulties and has finally decided to cease operations.Which of the following statements about DIY's consolidated financial statements is true?

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' beginning inventory?

Coral Ltd.owns 100% of Ambrose Ltd.Coral uses the cost method to record this subsidiary.Coral received $150,000 in dividends from Ambrose.What journal entry should Coral make on its consolidation worksheet with respect to the dividends?

On September 1,20X5,CanAir Limited decided to buy 100% of the shares outstanding of SkyAir Inc.for $500,000.Can Air will pay for this acquisition by using cash of $500,000.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: • 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: CanAir would like to report this investment in SkyAir using the equity method.Determine the income from this equity investment for the year. Determine the balance in the Investment in SkyAir account if the company used the equity method.

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: Calculate the consolidated retained earnings for Space as at December 31,20X7. Prepare the consolidated statement of financial position for the year ended December 31,20X7 for Space.

In 20X1,a parent company sold a tract of land to its subsidiary for $100,000,resulting in a $30,000 loss.The subsidiary's plans for the land did not materialize and it still owned the land at the end of 20X4.At the end of 20X4,what consolidating journal entry should be made with respect to the loss associated with the sale of land?

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: Space has decided to record its investment in Shuttle using the equity method.Determine the balance in the investment in Shuttle account at December 31,20X7 using the equity method. Prepare the statement of financial position and the statement of comprehensive income for the year ended December 31,20X7 for Space assuming it accounts for its investment in Shuttle using the equity method.

On December 31,20X2,the Pipe Ltd.purchased 100% of the outstanding common shares of the Fitter Ltd.for $10.5 million in cash.On that date,the shareholders' equity of Fitter 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 and amortization.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 income statements for Pipe and Fitter were as follows: As at December 31,20X6,the condensed balance sheets for the two companies were as follows: OTHER INFORMATION: 1.On December 31,20X2,Fitter had a building with a fair value that was $500,000 greater than its carrying value.The building had an estimated remaining useful life of 20 years. 2.On December 31,20X2,Fitter had trademark that was not reported on its balance sheet,but had a fair value that was $200,000.The trademark is amortized over 10 years. 3.During 20X6,Fitter sold merchandise to Pipe for $100,000,a price that includes a gross profit of $40,000.During 20X6,20% of this merchandise was resold by Pipe and the other 80% remains in its December 31,20X6 inventories.On December 31,20X5,the inventories of Pipe contained merchandise purchased from Fitter on which Fitter had recognized a gross profit in the amount of $50,000. 4.During 20X6,it was determined that the goodwill arising at the date of acquisition was impaired and that an impairment loss of $70,000 should be recorded.No impairment had been charged in earlier years. 5.During 20X6,Pipe declared and paid dividends of $300,000 while Fitter declared and paid dividends of $100,000. 6.Pipe accounts for its investment in Fitter using the cost method. The retained earnings of Pipe as at December 31,20X5 equalled $12,000,000.On that date,Fitter had retained earnings of $9,800,000.Fitter has not issued any common stock since its acquisition by Pipe. Required: Prepare,in good form,a consolidated statement of comprehensive income for the year ended December 31,20X6.

Piri Ltd.acquired 100% of the commons shares of Golden Co.This business combination resulted in $100,000 of goodwill.Piri allocated the goodwill to three cash-generating units.At its year-end,Piri conducts a goodwill impairment test.Which of the following statements about the impairment test is true?

Franklin Ltd. ,a subsidiary of Frayer Ltd. ,sold $500,000 of goods to its parent company in 20X1.At the end of 20X1,some of the goods were not sold and there was $90,000 of unrealized profit associated with these goods.The goods were sold in 20X2.At the end of 20X2,which of the following consolidating entries should be made with respect to the unrealized profits?

Fair value increments on depreciable assets ________.