Exam 6: Subsequent-Year Consolidations: General Approach

TLC Homecare Ltd. owns 100% of Errand Service for Seniors Ltd. (ESS). On January 2, 20X1, TLC bought 12 identical cars for $300,000. It promptly sold four of the cars to ESS for $112,000. ESS will amortize the cars over five years using the straight-line method. At December 31, 20X2, what is the net adjustment that should be made to accumulated depreciation in TLC's consolidated financial statements? Ignore income taxes.

Mallard Ltd. acquired 75% of the outstanding common shares of Teal Ltd. at December 31, 20X1, for $900,000. Mallard has recorded its investment using the cost method. - In 2008, Teal paid out dividends of $100,000. In preparing Mallard's consolidated financial statements, what elimination is required for the dividends?

On September 1, 20X5, Frank Limited decided to buy 70% of the shares outstanding of Jake Inc. for $840,000. Frank paid for this acquisition by using cash of $500,000 and marketable securities 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, Frank determines that some of the assets of Jake have fair values different from their carrying values. These items are listed below: • Inventory has a fair value of $130,000. • The building has a fair value of $1,090,000. The remaining useful life of the building is 20 years. • A customer list has a fair value of $200,000. The trademark is estimated to have a useful life of 10 years. • The bonds payable have a fair value of $720,000 and are due on August 31, 20X9. During the 20X9 fiscal year, the following events occurred: 1. Frank sold merchandise to jake for $\$ 200,000$ . Profit margin on these sales $1530 \%$ . Jake still has Inventory on hand of $\$ 70,000$ . Included in the opening inventory of Jake for $20 \times 9$ is merchandise purchased from Frank in $20 \times 8$ for $\$ 150,000$ . The gross profit mar gin on these sales was $30 \%$ 2. Jake sold merchandise to Frank for $\$ 500,000$ . The gross margin on these sales was $40 \%$ . At the end of the year, $\$ 180,000$ of this was still in Frank's inventory. Included in the opening inventory of Frank for $20 \times 9$ was merchandise purchased from Jake in $20 \times 8$ for $\$ 230,000$ . The profit margin on these sales was $30 \%$ . 3. During $20 \times 9$ , Jake sold to Frank equipment resulting in a gain to Jake of $\$ 75,000$ . At the time, the original cost and accumulated depreciation to date for the equipment on the Jake's books were $\$ 510,000$ and 160,000 . The remaining useful life for this equipment is 15 years. Depreciation is fully recorded in the year of purchase and no depreciation is recorded in the year of disposal by both companies. 4. During $20 \times 9$ , Jake paid management fees of $\$ 450,000$ to Frank. 5. During 20X9, lake paid dividends of $\$ 400,000$ and Frank paid dividends of $\$ 600,000$ . Required: Calculate the balance in the investment in Jake account at August 31, 20X9, if the company accounted for this subsidiary using the equity basis. Calculate the balance in the investment in Jake account at August 31, 20X9, if the company accounted for Jake as an associate using the proprietary theory basis for the equity method. Explain the difference between the two balances. Goodwill is determined using the parent-company extension approach.

Fox Co. acquired 60% of Sox Co. for $900,000. At the acquisition date, Sox had net assets with a book value of $950,000 and a fair value of $1,200,000. What is the amount of goodwill that should be reported on the consolidated SFP under the parent-company extension method and under the entity method? Parent-company extension Entity A) \ 0 \ 180,000 B) \ 0 \ 300,000 C) \ 120,000 \ 180,000 D) \ 300,000 \ 300,000

Farm owns 70% of the common shares of XL and accounts for its investment using the cost method. In 20X6, Farm purchased equipment from XL for $300,000. The equipment had been purchased by XL for $420,000 in 20X2, had accumulated depreciation of $168,000 and a six-year remaining life at December 31, 20X5. Both companies record a full year of depreciation expense in the year of the purchase and no depreciation in the year of a sale. Required: Indicate the consolidation adjustments to the following accounts for the years ended 20X6, 20X8, and 20X11: • Depreciation expense • Net book value of equipment • Non-controlling interest on statement of comprehensive income • Non-controlling interest on statement of financial position • Retained earnings, end of year

On September 1, 20X5, Hot Limited decided to buy 80% of the shares outstanding of Cold Inc. for $850,000. Hot paid for this acquisition by using cash of $500,000 and marketable securities 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, Hot determines that some of the assets of Cold have fair values different from their carrying values. These items are listed below: • Inventory has a fair value of $130,000. • The building has a fair value of $1,090,000. The remaining useful life of the building is 20 years. • A trademark has a fair value of $300,000. The trademark is estimated to have a useful life of 15 years. • The bonds payable have a fair value of $720,000 and are due on August 31, 20X9. During the 20X9 fiscal year, the following events occurred: 1. Hot sold merchandise to Cold for $200,000. Profit margin on these sales was 30%. Cold still has inventory on hand of $70,000. Included in the opening inventory of Cold for 20X9 is merchandise purchased from Hot in 20X8 for $150,000. The gross profit margin on these sales was 30% 2. Cold sold merchandise to Hot for $500,000. The gross margin on these sales was 40%. At the end of the year, $180,000 of this was still in Hot's inventory. Included in the opening inventory of Hot for 20X9 was merchandise purchased from Cold in 20X8 for $230,000. The profit margin on these sales was 30%. 3. During 20X9, Cold sold to Hot equipment resulting in a gain to Cold of $75,000. At the time, the original cost and accumulated depreciation to date for the equipment on Cold's books were $510,000 and 160,000. The remaining useful life for this equipment is 15 years. Depreciation is fully recorded in the year of purchase and no depreciation is recorded in the year of disposal by both companies. 4. During 20X9, Cold paid management fees of $450,000 to Hot. 5. During 20X9, Cold paid dividends of $400,000 and Hot paid dividends of $600,000. Required: Prepare the consolidated statement of comprehensive income and the consolidated statement of changes in equity-partial section for retained earnings for Hot at August 31, 20X9. Calculate the non-controlling interest's portion of net earnings for the year. Calculate the opening retained earnings balance at August 31, 20X8. The company uses the parent-company extension approach to determining goodwill.

Bowen Limited purchased 60% of Sloch Co. when Sloch's reported retained earnings were $330,000 and its share capital was $200,000. Bowen also owns 80% in Zeek Limited, which was purchased when Zeek reported retained earnings of $575,000 and had share capital of $270,000. For each acquisition, the purchase price was equal to the fair value of the identifiable net assets, which was the same as the carrying value of their carrying values. An analysis of the changes in retained earnings of the three companies at December 31, 20X7, was: Bowen Sloch Zeek Retained earnings-January 1,207 \ 1,020,000 \ 525,000 \ 875,000 Net income for the year 750,000 360,000 275,000 Dividends paid (500,000) (200,000) (100,000) Retained earnings- December 31, 20X7 Sloch sells product to Bowen that is used in Bowen's production. Bowen will then sell part of its products to Zeek. Intercompany profits included on sales from Sloch to Bowen were $25,000 included in January 1, 20X7, inventory, and $40,000 included in December 31, 20X7, inventory. Intercompany profits included on sales from Bowen to Zeek were $31,000 included in January 1, 20X7, inventory, and $35,000 included in December 31, 20X7, inventory. During 20X5, Bowen sold a building to Zeek for a gain of $300,000. The building had a remaining life of 25 years. During 20X7, Sloch sold a building to Bowen for a gain of $75,000. This building has a useful remaining life of 15 years. Full depreciation was recorded in the year of acquisition by each company and no depreciation was recorded in the year of sale. Required: Calculate the consolidated retained earnings and balance of the non-controlling interest at December 31, 20X7.

Roslynn Ltd. is a subsidiary of Goodale Co. Roslynn sold a machine to Goodale for a $50,000 gain. Goodale has now sold the machine to an unrelated party for a $20,000 gain. At the time of the sale, $35,000 of the profit on the sale from Roslynn was still unrealized. For consolidation purposes, what is the amount of gain that must be recognized on the sale of the machine?

Mallard Ltd. acquired 75% of the outstanding common shares of Teal Ltd. at December 31, 20X1, for $900,000. Mallard has recorded its investment using the cost method. - In 20X8, Mallard sold goods to Teal for $260,000 at a gross margin of 30% and Teal sold goods to Mallard for $180,000 at a gross margin of 50%. At the end of 20X8, Mallard still had $60,000 in inventory of goods purchased from Teal and Teal still had $45,000 in inventory of goods purchased from Mallard. What adjustment should be made for Mallard's 20X8 consolidated financial statements with respect to goods sold to Teal that are still in ending inventory?

Prawn Corporation owns 80% of the outstanding voting shares of Shrimp Corporation, having acquired its interest January 1, 20X3, for $100,000. At the time of the acquisition, Shrimp Corporation had a shareholders' equity totalling $50,000, made up of retained earnings of $30,000 and common shares of $20,000. The following accounts had fair values higher (or lower)than its carrying values: Inventory fair value is $\$ 10,000$ higher than carrying value. Equipment fair value is $\$ 40,000$ higher than carrying value Land fair value is $\$ 20,000$ lower than carrying value. The equipment had a remaining useful life at the time of acquisition of five years. The company uses the entity approach to determine the amount of goodwill. Prawn accounts for its investment in Shrimp using the cost method. Statement of Comprehensive Income Year Ended December 31, $20 \times 6$ (in thousands of \$'s) Prawn Shrimp Sales \ 600 \ 250 Gain on sale of land and buildings 0 70 Dividend income Total revenue Cost of goods sold 380 134 Operating expenses Total expenses Net Income Statement of Changes in Equity-Partial-Retained Earnings Section Year Ended December 31, 20X6 (In thousands of \$'s) Prawn Shrimp Opening retained earnings \ 400 \ 100 Net income 96 106 Dividends Ending retained eamings Additional Information: 1. Shrimp had reported a gain of $50,000, relating to land (40%)and building (60%)sold to Prawn on January 3, 20X6. These separate properties had not been owned on January 1, 20X3. Remaining useful life was expected to be 10 years at that time. 2. Shrimp sold other land to a non-related company at a gain of $20,000 on June 30, 20X6. 3. Intercompany sales and inventory data for 20X5 and 20X6: Sales by Prawn to Shrimp \ 40,000 \ 60,000 Inventory not yet sold at end of year \ 20,000 \ 35,000 Sales by Shrimp to Prawn \ 50,000 \ 50,000 Inventory not yet sold at end of year \ 10,000 \ 40,000 Profit margins on sales by Prawn to Shrimp are 40%. Profit margins on sales by Shrimp to Prawn are at 30%. Required: Prepare a complete consolidated statement of comprehensive income for the year ending December 31, 20X6.

A parent company can record its investment in a subsidiary using either the cost or the equity method. Which account will appear on the financial statements under the equity method, but not under the cost method?

Which of the following adjustments is not a cumulative operations adjustment in the consolidation process?

A parent company uses the equity method to record its investment in its subsidiary. To check the balance of the consolidated retained earnings, what amount should be added to the parent company's separate-entity retained earnings?

Grayson Ltd. acquired 60% of the outstanding common shares of Goldberg Ltd. for $480,000. At the date of acquisition, Goldberg's shareholders' equity was $625,000. The goodwill at 100% has been determined to be $90,000 under the entity method. -What is the amount of the non-controlling interest that should be reported under the entity method?

The calculation of the NCI on the consolidated SFP starts with the NCI's share of the subsidiary's net assets at the SFP date. Which of the following is not an adjustment that should be made in calculating the ending NCI balance?

Cooper Ltd. acquired 70% of the common shares of Effy Ltd. at January 2, 20X1. At December 31, 20X3, Effy sold a machine to Cooper for $180,000. Effy had purchased the machine a few years earlier for $250,000. At the time of sale to Cooper, the machine had a carrying value of $150,000 and a remaining useful life of six years. - Both companies do not claim amortization for assets purchased in the second half of the year. For Cooper's December 31, 20X3, consolidated financial statements, what net book value should be shown for the machine?

Singh Ltd. is a wholly owned subsidiary of Ross Co. At the beginning of 20X4, Ross acquired a machine for $350,000 and sold it to Singh for $437,500. The machine will be depreciated over five years using the straight-line method with no residual value. -Seven years after Singh bought the machine from Ross, the machine is still in use. In preparing its consolidated financial statements, what entry should Ross make?

On the consolidated statement of financial position, which balances differ between the parent-company extension method and the entity method?

In calculating the non-controlling interest in earnings, what is one of the adjustments that must be made to the subsidiary's separate-entity earnings before the NCI percentage can be applied?

Belzer Co. owns 70% of Sabo Ltd. At the beginning of 20X7, Sabo sold a piece of equipment to Belzer for a gain of $35,000. At that time, the equipment had an estimated useful life of seven years. -Ten years later, Belzer is still using the equipment. In preparing its consolidated financial statements, Belzer should credit the equipment account by $35,000. What account(s)should be debited in this journal entry?