Exam 5: Consolidation of Non-Wholly Owned Subsidiaries

There are alternative ways to calculate consolidated retained earnings. One of the methods requires adjustments to be made to the parent company's separate-entity ending retained earnings balance as of the consolidation date. What adjustments must be made to determine ending consolidated retained earnings?

In preparing consolidation working papers, why is it necessary to eliminate intercompany profits?

Portia Ltd. acquired 80% of Siro Ltd. on December 31, 20X0. At the acquisition date, Siro's net assets totalled $15,000. Portia uses the cost method to record the acquisition and consolidates using the entity method. At December 31, 20X1, the separate-entity financial statements showed the following: - During 20X1, Siro sold $7,000 of goods, with a gross margin of 40%, to Portia. At the end of 20X1, $3,000 of the goods were still in Portia's inventory. What is Portia's consolidated cost of goods sold for 20X1?

Jordan Ltd. acquired 80% of Cool Co. in 20X1. During 20X1, Cool sold inventory to Jordan. At the end of 20X2, the goods were still in Jordan's inventory. Jordan correctly eliminated the $10,000 of unrealized profits on its 20X2 consolidated financial statements and the goods were finally sold in 20X3. In preparing its 20X3 consolidated financial statements, what adjustments should be made with respect to the previously unrealized profit?

Bates Ltd. owns 60% of the outstanding common shares of Sam Ltd. During 20X6, sales from Sam to Bates were $200,000. Merchandise was priced to provide Sam with a gross margin of 20%. Bates's inventories contained $40,000 at December 31, 20X5, and $15,000 at December 31, 20X6, of merchandise purchased from Sam. Cost of goods sold for Bates and Sam for 20X6 on their separate-entity income statements were as follows: Beginning inventory \ 100,000 \ 50,000 Purchases 700,000 200,000 Ending inventory Cost of goods sold \ \ - What is cost of sales on the consolidated statement of income for 20X6?

Under the parent-company extension method, to which company should the impairment of goodwill be attributed?

Devon Ltd. acquired 90% of Luka Ltd. for $100,000 less than the fair value. How should this $100,000 be treated on Devon's consolidated financial statements?

What is the purpose of showing an allocation of the net income between the parent and the subsidiary companies on the consolidated statement of comprehensive income?

Which of the following statements is true about a bargain purchase?

Pooke Co. acquired 75% of Finch Ltd. three years ago. In calculating the balance for the non-controlling interest, Pooke started with the net income from Finch's current year-end separate-entity financial statements. Which of the following adjustments must be added to Finch's net income in calculating Finch's adjusted net income?

On September 1, 20X5, High Limited decided to buy 70% of the shares outstanding of Low Inc. for $630,000. High 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: $\begin{array}{|l|r|r|}\hline &\text { High } & \text { Low } \\&\$ & \$\\\hline\text { Assets }\\\hline \text { Cash } & 525,000 & 40,000 \\\hline \text { Accounts receivable } & 65,000 & 35,000 \\\hline \text { Inventory supplies } & 50,000 & 50,000 \\\hline \text { Land } & 525,000 & 275,000 \\\hline \text { Buildings and equipment } & 3,450,000 & 925,000 \\\hline \text { Accumulated depreciation } & (865,000) & (125,000) \\\hline \text { Total assets } & \underline{3,750,000} & \underline{1,200,000} \\\hline\\\hline \text { Liabilities } & & \\\hline \text { Current liabilities } & & \\\hline \text { Accounts payable } & 665,000 & 280,000 \\\hline \text { Bonds payable } & 1,350,000 & 620,000 \\\hline & 2015,000 & 900,000 \\\hline\\\hline \text { Shareholders' equity } & & \\\hline \text { Common shares } & 950,000 & 250,000 \\\hline \text { Retained earnings } & \underline{785,000} & \underline{50,000} \\\hline \text { Total shareholders' equity } & \underline{1,735,000} & \underline{300,000} \\\hline \text { Total liabilities and shareholders' equity } & \underline{3,750,000} & \underline{\underline{1}, 200,000} \\\hline\end{array}$ After a review of the assets and liabilities, High determines that some of the assets of Low have fair values different from their carrying values. These items are listed below: • Accounts payable had a fair value of $295,000. • The building has a fair value of $1,090,000. The remaining useful life of the building is 20 years. • Patent is $80,000. The patent is estimated to have a useful life of five years. During the 20X7 fiscal year, the following events occurred: 1. On March 1, 20X7, Low sold land to High for $390,000, which had a carrying value of $275,000. High 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. High sold inventory to Low for $300,000. Profit margin on these sales is 25%. Low still has inventory on hand of $80,000. 3. In 20X6, Low had provided inventory to High for a value of $600,000. This amount was included in sales for Low. Profit margin on these sales is 35%. At the end of August, 20X6, High still had an amount of $200,000 in these prepaid seats that had not yet been used. $\begin{array}{c}\text { Statement of Financial Position }\\\text { August 31,20 \times 7 }\\\\\begin{array}{|l|c|c|}\hline &\text { High } & \text { Low } \\&\$ & \$\\\hline\text { Assets }\\\hline \text { Cash } & 490,000 & 10,000 \\\hline \text { Accounts receivable } & 85,000 & 25,000 \\\hline \text { Inventory } & 260,000 & 80,000 \\\hline \text { Note receivable-High } & & 300,000 \\\hline \text { Investment in Low } & 630,000 & \\\hline \text { Land } & 915,000 & \\\hline \text { Buildings and equipment } & 3,745,000 & 1,610,000 \\\hline \text { Accumulated depreciation } & (1,865,000) & (675,000) \\\hline \text { Total assets } & 4,260,000 & 1,350,000 \\\hline\\\hline \text { Liabilities } & & \\\hline \text { Current liabilities } & & \\\hline \text { Accounts payable } & 855,000 & 580,000 \\\hline \text { Bonds payable } & 850,000 & 820,000 \\\hline \text { Note payable to Low } & \underline{300,000} & \underline{0} \\\hline&2,005,000&1,400,000\\\hline \text { Shareholders' equity } & & \\\hline \text { Common shares } & 1,080,000 & 250,000 \\\hline \text { Retained earnings (deficit) } & \underline{1,175,000} & \underline{(300,000)} \\\hline \text { Total liabilities and shareholders' equity } & \underline{4,260,000} & \underline{1,350,000} \\\hline\end{array}\end{array}$ $\begin{array}{c}\text { Statement of Comprehensive Income }\\\text { Year Ended August 31, 20 \times 7 }\\\\\begin{array}{|l|r|r|}\hline &\text { High } & \text { Low } \\&\$ & \$\\\hline\text { Sales } & 6,560,000 & 1,540,000 \\\hline \text { Gain on sale of land } & 0 & 115,000 \\\hline \text { Interest income } & 0 & 15,000 \\\hline & 6,560,000 & 1,670,00 \\\hline \text { Cost of sales } & 4,980,000 & 1,030,000 \\\hline \text { Depreciation and amortization expenses } & 250,000 & 125,000 \\\hline \text { Interest expense } & 15,000 &\\\hline \text { Management fees } & & \\\hline \text { Other expenses } & 565,000 & \underline{1.040,000} \\\hline & \underline{5,810,000} & \underline{2,195,000} \\\hline \text { Net income(loss) } & \underline{Z 50,000} & \underline{(525,000}) \\\hline\end{array}\end{array}$ Required: Calculate the balances for the following consolidated balances of High at August 31, 20X7, assuming High uses the entity approach: a. Goodwill b. Non-controlling interest c. Buildings and equipment, net

Explain why a parent might want to own less than 100% of the shares of a subsidiary.

Lopez Ltd. purchases 65% of Wheatfall Co. Under the entity method of consolidation, what is allocated to non-controlling interest?

Which consolidation approach includes only the parent's share of a subsidiary's goodwill?

Sunny Co. purchased 80% of Reuben Ltd. for $1,200,000. At the date of acquisition, the carrying value of Reuben's net identifiable assets was $1,000,000, and the fair value was $1,300,000. What is the amount of the goodwill under the entity method?

Which of the following statements about IFRS 3, Business Combinations is true?

On September 1, 20X5, High Limited decided to buy 80% of the shares outstanding of Low Inc. for $630,000. High 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: $\begin{array}{|l|r|r}\hline &\text { High } & \text { Low } \\&\$ & \$\\\hline\\\hline\text { Cash } & 525,000 & 40,000 \\\hline \text { Accounts receivable } & 65,000 & 35,000 \\\hline \text { Inventory supplies } & 50,000 & 50,000 \\\hline \text { Land } & 525,000 & 275,000 \\\hline \text { Buildings and equipment } & 3,450,000 & 925,000 \\\hline \text { Accumulated depreciation } & \underline{865,000}) & \underline{125,000} \\\hline \text { Total assets } & \underline{3,750,000} & \underline{1,200,000} \\\hline\\\hline \text { Liabilities } & & \\\hline \text { Current liabilities } & & \\\hline \text { Accounts payable } & 665,000 & 280,000 \\\hline \text { Bonds payable } & 1,350,000 & 620,000 \\\hline\\\hline \text { Shareholders' equity } & & \\\hline \text { Common shares } & 950,000 & 250,000 \\\hline \text { Retained earnings } & \underline{785,000} & \underline{50,00} \\\hline \text { Total liabilities and shareholders' equity } & \underline{3,750,000} & \underline{1,200,000} \\\hline\end{array}$ After a review of the assets and liabilities, High determines that some of the assets of Low have fair values different from their carrying values. These items are listed below: • Land has a fair value of $295,000. • The building has a fair value of $1,090,000. The remaining useful life of the building is 20 years. • Brand value is $60,000. The brand has an indefinite life. During the 20X7 fiscal year, the following events occurred: 1. On March 1, 20X7, Low sold land to High for $390,000, which had a carrying value of $275,000. High 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. High sold inventory (included in High sales)to Low for $200,000. Profit margin on these sales is 25%. Low still has supplies on hand of $75,000. 3. In 20X6, Low had provided seat space on flights to High for a value of $500,000. This amount was included in sales for Low. Profit margin on these sales is 40%. At the end of August, 20X6, High still had an amount of $200,000 in these prepaid seats that had not yet been used. (High includes this in inventory.) 4. The brand name was found to be impaired and an impairment loss of $40,000 was recognized. $\begin{array}{c}\text {Statement of Comprehensive Income }\\\text {Year Ended August 31, 20X7}\\\\\begin{array}{|l|r|r|}\hline &\text { High } & \text { Low } \\&\$ & \$\\\hline \text { Sales } & 6,560,000 & 1,540,000 \\\hline \text { Gain on sale of land } & 0 & 115,000 \\\hline \text { Interest income } & 0 & 15,000 \\\hline & 6,560,000 & 1,670,000 \\\hline \text { Cost of sales } & 4,980,000 & 1,030,000 \\\hline \text { Depreciation and amortization expenses } & 250,000 & 125,000 \\\hline \text { Interest expense } & 15,000 & \\\hline \text { Management fees } & & \\\hline \text { Other expenses } & \underline{565,000} & \underline{1,040,000} \\\hline & 5,810,000 & 2,195,000 \\\hline \text { Net income }(\text { loss) } & 750,000 & \underline{(525,000)} \\\hline\end{array}\end{array}$ Required: Calculate the balances for the following consolidated balances of High assuming High uses the parent-company extension method approach: a. Goodwill at August 31, 20X5 b. Retained earnings at August 31, 20X7 c. Brand name, net, at August 31, 20X7.

Bates Ltd. owns 60% of the outstanding common shares of Sam Ltd. During 20X6, sales from Sam to Bates were $200,000. Merchandise was priced to provide Sam with a gross margin of 20%. Bates's inventories contained $40,000 at December 31, 20X5, and $15,000 at December 31, 20X6, of merchandise purchased from Sam. Cost of goods sold for Bates and Sam for 20X6 on their separate-entity income statements were as follows: Beginning inventory \ 100,000 \ 50,000 Purchases 700,000 200,000 Ending inventory Cost of goods sold \ \ - What is the balance of the consolidated inventory account at December 31, 20X6?

On December 31, 20X5, Paper Co. purchased 60% of the outstanding common shares of Book Ltd. for $760,000 in shares and $200,000 in cash. The statements of financial position of Paper and Book immediately before the acquisition and issuance of the notes payable were as follows (in 000s): $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text {Paper}\quad\quad\quad\text {Book}$ Book Fair Book Fair Value Value Value Value Cash \ 360 \ 360 \ 200 \ 200 Accounts receivable 520 500 380 380 Inventory 800 880 400 360 Property, plant, and equipment 2,000 1,640 \ 3,500 \ 2,400 Accounts payable \ 380 \ 380 \ 260 \ 260 Long-term liabilities 1,200 1,200 1000 1000 Common shares 500 600 Retained earnings \ 3,500 \ 2,400 The difference in the carrying value and the fair value of the capital assets for Book relates to its office building. This building has an estimated 20 years remaining of useful life. During 20X6, the year following the acquisition, the following occurred: 1. Throughout the year, Book purchased merchandise of $800,000 from Paper. Paper's gross margin is 30% of selling price. At December 31, 20X6, Book still owed Paper $250,000 on this merchandise; 75% of this merchandise was resold by Book prior to December 31, 20X6. 2. Throughout the year, Book sold merchandise to Paper totalling $500,000. The gross margin on these products is 25%. At the end of 20X6, Paper had not yet resold 60% of this merchandise. 3. Management fees were paid to Paper from Book totalling $250,000. 4. Book paid dividends of $250,000 at the end of 20X6 and Paper paid dividends of $500,000. During 20X7, the following occurred: 1. Throughout the year, Book purchased merchandise of $1,000,000 from Paper. Paper's gross margin is 30% of selling price. At December 31, 20X6, Book still owed Paper $150,000 on this merchandise; 85% of this merchandise was resold by Book prior to December 31, 20X7. 2. Throughout the year, Book sold merchandise to Paper totalling $650,000. The gross margin in these products is 25%. At the end of 20X6, Paper had not yet resold 40% of this merchandise. 3. Management fees were paid to Paper from Book totalling $250,000. 4. Book paid dividends of $250,000 at the end of 20X7 and Paper paid dividends of $500,000. 5. An impairment loss of $100,000 was recognized related to the goodwill. 6. Paper uses the cost method to report its investment in Book. $\begin{array}{c}\text {Statement of Financial Position}\\\text {December 31, 20X7}\\\text {(in thousands of \$'s)}\\\\\begin{array}{|l|r|r|}\hline & \text { Paper } & \text { Book } \\\text { Assets } & \$ & \$\\\hline \text { Cash } & 50 & 210 \\\hline \text { Accounts receivable } & 575 & 410 \\\hline \text { Inventories } & 825 & 430 \\\hline \text { Property, plant, and equipment, net } & 2,870 & 1,760 \\\hline \text { Investment in Book } & \underline{960} & \\\hline \text { Total assets } & \underline{5,280} & \underline{2}, 810 \\\hline\\\hline \text { Liabilities } & & \\\hline \text { Accounts payable } & 465 & 32 \\\hline \text { Long-term liabilities } & 1,290 & 950 \\\hline \text { Common shares } & 1,260 & 600 \\\hline \text { Retained earnings } & \underline{2,265} & \underline{935} \\\hline \text { Total liabilities and shareholders' equity } & \underline{5,280} & \underline{2,810} \\\hline\end{array}\end{array}$ $\begin{array}{c}\text {Statement of Comprehensive Income}\\\text { Year Ended December 31, 20X7}\\\text {(in thousands of \$'s)}\\\\\begin{array}{|l|r|r|} \hline & \text { Paper } & \text { Book } \\& \$ & \$\\\hline \text { Sales } & 2,520 & 2,400 \\\hline \text { Management fees } & 250 & \\\hline \text { Dividend income } & 150 & \\\hline & 2,920 & 2,400 \\\hline\\\hline \text { Cost of sales } & 800 & 1,200 \\\hline \text { Depreciation and amortization expenses } & 670 & 325 \\\hline \text { Management fees expense } & & 250 \\\hline \text { Other expenses } & \underline{460} & \underline{135} \\\hline & \underline{1,930} & \underline{1,910} \\\hline \text { Net income } & \underline{990} & \underline{\underline{490}} \\\hline \end{array}\end{array}$ $\begin{array}{c}\text { Statement of Changes in Equity-Retained Earnings Section}\\\text { Year Ended December 31, 20X7 }\\ \text { (in thousands of \$'s)}\\\\\begin{array}{|l|r|r|}\hline & \text { Paper } & \text { Book } \\& \$ & \$\\\hline \text { Retained earnings, December 31, 20X6 } & 1,775 & 695 \\\hline \text { Net income } & 990 & 490 \\\hline \text { Dividends declared } & \underline{(500)} & \underline{250}) \\\text { Retained earnings, December 31, 20X7 } & \underline{2,265} & \underline{235} \\\hline\end{array}\end{array}$ Required: Prepare the consolidated statement of comprehensive income for Paper Co. for the year ended December 31, 20X7, under the entity method. Calculate the consolidated retained earnings for Paper Co. as at December 31, 20X6, and 20X7. Prepare the consolidated statement of retained earnings for Paper Co. as at December 31, 20X7.

Assume that a parent company has four subsidiaries. Under IFRS 3, which of the following statements is true?