Exam 4: Wholly Owned Subsidiaries: Reporting Subsequent Acquisitions

Thivan Ltd. is a wholly-owned subsidiary of Bateman Co. Thivan has declared dividends of $100,000. - Under the equity method, what entry should Bateman record on its books?

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 December 31, 20X1, Dad Ltd. purchased 100% of the outstanding common shares of Sad Ltd. for $9.5 million in cash. On that date, the shareholders' equity of Sad totalled $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. Dad records the investment in Sad using the cost method. For the year ending December 31, 20X6, the statements of comprehensive income for Dad and Sad were as follows: Dad Sad Sales and other revenue Cost of goods sold 16,000,000 5,000,000 Amortization expense 2,500,000 2,000,000 Other expenses (including taxes) Net income At December 31, 20X6, the condensed statements of financial position for the two companies were as follows: Dad Sad Total assets \ 31,000,000 \ 13,500,000 Liabilities \ 5,000,000 \ 1,200,000 No par common shares 12,100,000 1,000,000 Retained earnings Total liabilities andshareholders' equity 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. Prepare a condensed statement of financial position as at December 31, 20X6.

What does "one-line consolidation" refer to?

Goodwill impairment testing can involve comparing the recoverable amount of a cash-generating unit to its ________.

Fair value increments on depreciable assets ________.

On December 31, 20X2, Pipe Ltd. purchased 100% of the outstanding common shares of Fitter Ltd. for $10.5 million in cash. On that date, the shareholders' equity of Fitter totalled $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: Pipe Fitter Sales and other revenue Cost of goods sold 16,000,000 5,000,000 Depreciation expense 2,500,000 2,000,000 Other expenses Net income At December 31, 20X6, the condensed balance sheets for the two companies were as follows: Pipe Fitter Total assets \ 31,000,000 \ 13,500,000 Liabilities \ 5,000,000 \ 1,200,000 No par common stock 12,100,000 1,000,000 Retained earnings Total liabilities and shareholders' equity 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 included 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. Calculate the consolidated net earnings for 20X6. Prepare the consolidated statement of changes equity-partial statement showing the change in retained earnings for December 31, 20X6, for Pipe. Prepare the condensed consolidated statement of financial position for Pipe as at December 31, 20X6.

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?

Mitzi'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 Mitzi'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 and a remaining useful life of eight years. With respect to the baking system, how much amortization expense should Delicious Bakeries report on its consolidated financial statements at the end of 20X3?

Thivan Ltd. is a wholly-owned subsidiary of Bateman Co. Thivan has declared dividends of $100,000. - Bateman uses the equity method to record this investment and has properly reflected Thivan's dividend declaration on its books. What journal entry should Bateman make when it receives the dividends?

Flatt Ltd. is a wholly-owned subsidiary of Franco Ltd. For consolidation purposes, how does the treatment of unrealized profits on upstream sales differ from the treatment of unrealized profits on downstream sales?

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): $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text {Space}\quad\quad\quad\quad\text {Shuttle}$ Book Fair Book Fair Value Value Value Value Cash \ 360 \ 360 \ 200 \ 200 Accounts receivable 520 500 380 340 Inventory 800 880 400 Property, plant, and equipment 2,000 1,520 Accounts payable \ 380 \ 380 \ 260 \ 260 Long-term liabilities 1,200 1,200 1000 1000 Common shares 500 600 Retained earnings 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 remainder of the year. 2. Throughout the year, Space purchased merchandise of $800,000 from Shuttle. Shuttle's gross margin is 35% of selling price. At December 31, 20X6, Shuttle still owed Space $250,000 on this merchandise; 60% of this merchandise was resold by Space 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, Space purchased merchandise of $900,000 from Space. Space's gross margin is 35% of selling price. At December 31, 20X6, Shuttle still owed Space $350,000 on this merchandise; 80% of this merchandise was resold by Shuttle prior to December 31, 20X7. 3. The goodwill was tested and found to be impaired, resulting in an impairment loss of $120,000. 4. 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.

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?

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 Sad Ltd. for $9.5 million in cash. On that date, the shareholders' equity of Sad totalled $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: Dad Sad Sales and other revenue Cost of goods sold 16,000,000 5,000,000 Amortization expense 2,500,000 2,000,000 Other expenses (including taxes) Total expenses (including taxes) Net income At December 31, 20X6, the condensed statements of financial position for the two companies were as follows: Dad Sad Total assets \ 31,000,000 \ 13,500,000 Liabilities \ 5,000,000 \ 1,200,000 No par common shares 12,100,000 1,000,000 Retained earnings Total liabilities andshareholders' equity 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. Prepare the consolidated statement of comprehensive income for the year ended December 31, 20X6.

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?

Waite Co. is a wholly-earned 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?

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 shares 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 residual 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, with respect to the $10,000 fair value adjustment to inventory?

In 20X1, a parent company sold a tract of land to its wholly owned 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 September 1, 20X5, CanAir Limited decided to buy 100% of the shares outstanding of SkyAir Inc. for $900,000. CanAir 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 five years. • Customer lists have a fair value is $35,000. It is estimated that the customer lists will have a useful life of seven 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. CanAir 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 cost. SkyAir still has supplies on hand of $70,000. 4. In 20X8, SkyAir 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.) 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.