Exam 8: Consolidated Cash Flows and Changes in Ownership

The following information pertains to the shareholdings of an affiliated group of companies. The respective ownership interest of each company is outlined below. A Inc.: A Inc. owns 75% of J Inc. and 60% of G Inc. J Inc.: J Inc. owns 60% of D Inc. and 20% of G Inc. G Inc.: G Inc. owns 10% of D Inc. and 80% of Y Inc. All intercompany investments are accounted for using the equity method. The Net Incomes for these companies for the year ended December 31, 2020 were as follows: A Inc. \ 1,000,000 J Inc. \ 200,000 G Inc. \ 600,000 D Inc. \ 300,000 Y Inc. \ 100,000 Unrealized intercompany profits (pre-tax) earned by the various companies for the year ended December 31, 2020 are shown below: G Inc. \ 10,000 Y Inc. \ 10,000 J Inc. \ 20,000 All companies are subject to a 25% tax rate. How much is A Inc.'s Consolidated Net Income for 2020?

Whine purchased 80% of the outstanding voting shares of Dine Inc. on December 31, 2020. The balance sheets of both companies on that date are shown below (after Whine acquired the shares): WHINE DINE Cash \ 250,000 \ 200,000 Accounts Receivable \ 450,000 \ 300,000 Inventory \ 500,000 \ 100,000 Investment in Dine Inc. \ 500,000 Land \ 140,000 Equipment (net) \ 460,000 \ 200,000 Total Assets Current Liabilities \ 900,000 \ 200,000 Bonds Payable \ 500,000 \ 100,000 Common Shares \ 500,000 \ 200,000 Retained Earnings \ 400,000 \ 300,000 Total Liabilities and Equity \ \ Also on December 31, 2020 (after the financial statements appearing above had been prepared) Chompster Inc., one of Whine's main competitors has agreed to acquire an equity interest in Dine Inc. As a result of the agreement, Dine Inc. would issue another 8,000 shares (over and above the 32,000 shares it currently has outstanding) to Chompster for $20 per share. The acquisition differential on the date of acquisition was attributed entirely to equipment, which had a remaining useful life of ten years from the date of acquisition. Whine Inc. uses the equity method to account for its investment in Dine Inc. There were no unrealized intercompany profits on December 31, 2020. The amount of common shares appearing on the December 31, 2020 consolidated balance sheet would be:

On January 1, 2019, Hanson Inc. purchased 54,000 voting shares out of Marvin Inc.'s 90,000 outstanding voting shares for $240,000. On that date, Marvin's common shares and retained earnings were valued at $60,000 and $90,000, respectively. Marvin's book values approximated its fair values on the acquisition date with the exception of the company's equipment, which was estimated to have a fair value that was $50,000 in excess of its recorded book value. The equipment was estimated to have a useful life of eight years. Both companies use straight line amortization exclusively. On January 1, 2020, Hanson purchased an additional 9,000 shares of Marvin Inc. on the open market for $45,000. On this date, Marvin's book values were equal to its fair values with the exception of the company's equipment, which is now thought to be undervalued by $60,000. Moreover, the equipment's estimated useful life was revised to 5 years on this date. Marvin's net income and dividends for 2019 and 2020 are as follows: Net Incorne Dividends Marvin's goodwill suffered an impairment loss of $5,000 during 2019. Hanson Inc. uses the equity method to account for its investment in Marvin Inc. What is the amount of goodwill arising from Hanson's January 1, 2019 acquisition?

On January 1, 2019, Hanson Inc. purchased 54,000 voting shares out of Marvin Inc.'s 90,000 outstanding voting shares for $240,000. On that date, Marvin's common shares and retained earnings were valued at $60,000 and $90,000, respectively. Marvin's book values approximated its fair values on the acquisition date with the exception of the company's equipment, which was estimated to have a fair value that was $50,000 in excess of its recorded book value. The equipment was estimated to have a useful life of eight years. Both companies use straight line amortization exclusively. On January 1, 2020, Hanson purchased an additional 9,000 shares of Marvin Inc. on the open market for $45,000. On this date, Marvin's book values were equal to its fair values with the exception of the company's equipment, which is now thought to be undervalued by $60,000. Moreover, the equipment's estimated useful life was revised to 5 years on this date. Marvin's net income and dividends for 2019 and 2020 are as follows: Net Incorne Dividends Marvin's goodwill suffered an impairment loss of $5,000 during 2019. Hanson Inc. uses the equity method to account for its investment in Marvin Inc. What is Hanson's ownership interest in Marvin after its January 1, 2020 purchase?

On January 1, 2017, Lime Inc. acquired 80,000 common shares of Stone Corp. for $900,000. On January 1, 2017 Stone's balance sheet showed the following shareholders' equity: 3 cumulative preferred shares, 20,000 shares issued \ 120,000 Common shares, 100,000 shares issued \ 600,000 Surplus (Deficit) (\ 10,000 \ 710,000 * Stone's preferred share dividends were one year in arrears on that date. Stone's fair values approximated its book values on that date with the following exceptions:  Inventory had a fair value that was $30,000 higher than its book value. Plant and equipment had a fair value $10,000 lower than their book value.  The plant and equipment had an estimated remaining useful life of 10 years from the date of acquisition. The financial statements of Lime Inc. and its subsidiary Stone Corp. on December 31, 2020 are shown below: LIME Inc. STONE Corp RETAINED EARNINGS STATEMENTS Balance, January 1, 2020 \ 200,000 \ 370,000 Net Income \ 350,000 \ 222,000 Less: dividends (\ 25,000) (\ 100,000) Retained earnings \ 525,000 \ 492,000 BALANCE SHEETS Cash \ 120,000 \ 3,000 Accounts receivable \ 270,000 \ 255,000 Inventory \ 165,000 \ 144,000 Land \ 210,000 Plant and equipment \ 1,200,000 \ 2,100,000 Accumulated depreciation (\ 690,000) (\ 900,000) Investment in Stone (common) \ 900,000 Total Assets \ 2,175,000 \ 1,602,000 Accounts payable \ 276,000 \ 330,000 Accrued liabilities \ 24,000 \ 30,000 Preferred shares \ 150,000 Common shares \ 1,350,000 \ 600,000 Retained earnings \ 525,000 \ 492,000 Total Liabilities and Equity \ 2,175,000 \ 1,602,000 Other Information:  Intercompany sales of inventory for 2020 were as follows: Lime to Stone: \ 50,000 Stone to Lime: \ 40,000  Unrealized intercompany profits in inventory for 2020 were as follows: January 1, 2020: Stone's Inventory \ 10,000 Lime's Inventory \ 20,000 December 31, 2020: Stone's Inventory \ 6,000 Lime's Inventory \ 8,000  On January 1, 2018, Stone sold equipment to Lime for $30,000. The equipment had a carrying value of $27,000 on that date and an estimated useful life of 3 years. The inventory on hand at the start of 2020 was sold to outsiders during the year.  Both companies are subject to a tax rate of 40%. There were no dividends in arrears on December 31, 2019. Lime uses the cost method to account for its investment in Stone. Prepare a calculation of Consolidated Retained Earnings at as December 31, 2020. Calculation of Consolidated Retained Earnings:

On January 1, 2017, Lime Inc. acquired 80,000 common shares of Stone Corp. for $900,000. On January 1, 2017 Stone's balance sheet showed the following shareholders' equity: 3 cumulative preferred shares, 20,000 shares issued \ 120,000 Common shares, 100,000 shares issued \ 600,000 Surplus (Deficit) (\ 10,000 \ 710,000 * Stone's preferred share dividends were one year in arrears on that date. Stone's fair values approximated its book values on that date with the following exceptions:  Inventory had a fair value that was $30,000 higher than its book value. Plant and equipment had a fair value $10,000 lower than their book value.  The plant and equipment had an estimated remaining useful life of 10 years from the date of acquisition. The financial statements of Lime Inc. and its subsidiary Stone Corp. on December 31, 2020 are shown below: LIME Inc. STONE Corp RETAINED EARNINGS STATEMENTS Balance, January 1, 2020 \ 200,000 \ 370,000 Net Income \ 350,000 \ 222,000 Less: dividends (\ 25,000) (\ 100,000 Retained earnings \ 525,000 \ 492,000 BALANCE SHEETS Cash \ 120,000 \ 3,000 Accounts receivable \ 270,000 \ 255,000 Inventory \ 165,000 \ 144,000 Land \ 210,000 Plant and equipment \ 1,200,000 \ 2,100,000 Accumulated depreciation (\ 690,000) (\ 900,000) Investment in Stone (common) \ 900,000 Total Assets \ 2,175,000 \ 1,602,000 Accounts payable \ 276,000 \ 330,000 Accrued liabilities \ 24,000 \ 30,000 Preferred shares \ 150,000 Common shares \ 1,350,000 \ 600,000 Retained earnings \ 525,000 \ 492,000 Total Liabilities and Equity \ 2,175,000 \ 1,602,000 Other Information:  Intercompany sales of inventory for 2020 were as follows: Lime to Stone: \ 50,000 Stone to Lime: \ 40,000  Unrealized intercompany profits in inventory for 2020 were as follows: January 1, 2020: Stone's Inventory \ 10,000 Lime's Inventory \ 20,000 December 31, 2020: Stone's Inventory \ 6,000 Lime's Inventory \ 8,000  On January 1, 2018, Stone sold equipment to Lime for $30,000. The equipment had a carrying value of $27,000 on that date and an estimated useful life of 3 years. The inventory on hand at the start of 2020 was sold to outsiders during the year.  Both companies are subject to a tax rate of 40%. There were no dividends in arrears on December 31, 2019. Lime uses the cost method to account for its investment in Stone. Prepare Lime's December 31, 2020 Consolidated Balance Sheet. Lime Inc. Consolidated Balance Sheet As At December 31, 2020

ABC Inc. purchased 35,000 voting shares out of 123 Inc.'s 50,000 outstanding voting shares for $350,000 on January 1, 2020. On the date of acquisition, 123's common shares and retained earnings were valued at $120,000 and $180,000, respectively. 123's book values approximated its fair values on the acquisition date with the exception of a patent and a trademark, neither of which had been previously recorded. The fair values of the patent and trademark on the date of acquisition were $30,000 and $20,000 respectively. On January 2, 2020, ABC sold 7,000 shares of 123 on the open market for $57,750. ABC Inc. uses the equity method to account for its investment in 123 Inc. What would be the amount of the gain or loss on the sale of the 7,000 shares?

P Corp. owns 800 voting common shares out of Q Corp.'s 1,000 outstanding voting common shares, which it accounts for using the equity method. On December 31, 2018, the shareholder's equity section of Q Corp. was comprised of $15,000 in common shares and retained earnings of $450,000. Q Corp. reported net income and paid dividends of $120,000 and $20,000 respectively for the year ended December 31, 2019. There have been no goodwill impairment losses since acquisition. On January 1, 2020, P Corp. sold 200 shares of its investment in Q Corp. for $125,000. On January 1, 2019, the investment account had a balance of $420,000. The acquisition differential was to be allocated as follows: 60% to patents (6 year remaining life). 30% to equipment (9 year remaining life). What is the gain or loss on P's sale of its shares on Q Corp.?

Which of the following is not included in the amount of shareholders' equity allocated to the holders of the preference shares on the consolidated balance sheet?

On January 1, 2017, Lime Inc. acquired 80,000 common shares of Stone Corp. for $900,000. On January 1, 2017 Stone's balance sheet showed the following shareholders' equity: \ 3 cumulative preferred shares, 20,000 shares issued \ 120,000 Common shares, 100,000 shares issued \ 600,000 Surplus (Deficit) (\ 10,000 \7 10,000 * Stone's preferred share dividends were one year in arrears on that date. Stone's fair values approximated its book values on that date with the following exceptions:  Inventory had a fair value that was $30,000 higher than its book value. Plant and equipment had a fair value $10,000 lower than their book value.  The plant and equipment had an estimated remaining useful life of 10 years from the date of acquisition. The financial statements of Lime Inc. and its subsidiary Stone Corp. on December 31, 2020 are shown below: LIME Inc. STONE Corp. RETAINED EARNINGS STATEMENTS Balance, January 1, 2020 \ 200,000 \ 370,000 Net Income \ 350,000 \ 222,000 Less: dividends (\ 25,000) (\ 100,000) Retained earnings \ 525,000 \ 492,000 BALANCE SHEETS Cash \ 120,000 \ 3,000 Accounts receivable \ 270,000 \ 255,000 Inventory \ 165,000 \ 144,000 Land \ 210,000 Plant and equipment \ 1,200,000 \ 2,100,000 Accumulated depreciation (\ 690,000) (\ 900,000) Investment in Stone (common) \ 900,000 Total Assets \ 2,175,000 \ 1,602,000 Accounts payable \ 276,000 \ 330,000 Accrued liabilities \ 24,000 \ 30,000 Preferred shares \ 150,000 Common shares \ 1,350,000 \ 600,000 Retained earnings \ 525,000 \ 492,000 Total Liabilities and Equity \ 2,175,000 \ 1,602,000 Other Information:  Intercompany sales of inventory for 2020 were as follows: Lime to Stone: \ 50,000 Stone to Lime: \ 40,000  Unrealized intercompany profits in inventory for 2020 were as follows: January 1, 2020: Stone's Inventory \ 10,000 Lime's Inventory \ 20,000 December 31,2020: Stone's Inventory \ 6,000 Lime's Inventory \ 8,000  On January 1, 2018, Stone sold equipment to Lime for $30,000. The equipment had a carrying value of $27,000 on that date and an estimated useful life of 3 years. The inventory on hand at the start of 2020 was sold to outsiders during the year.  Both companies are subject to a tax rate of 40%. There were no dividends in arrears on December 31, 2019. Lime uses the cost method to account for its investment in Stone. Compute the Consolidated Net Income for 2020 and show its allocation between the controlling and non-controlling interests. Do not prepare an Income Statement.

If the shareholders' equity allocated to the subsidiary's preference shares amounts to $240,000 and the parent company acquires 60% of the subsidiary's preference shares at a cost of $150,000, how much will the amount of cash on the consolidated balance sheet change as a result of this transaction?

Whine purchased 80% of the outstanding voting shares of Dine Inc. on December 31, 2020. The balance sheets of both companies on that date are shown below (after Whine acquired the shares): WHINE DINE Cash \ 250,000 \ 200,000 Accounts Receivable \ 450,000 \ 300,000 Inventory \ 500,000 \ 100,000 Investment in Dine Inc. \ 500,000 Land \ 140,000 Equipment (net) \ 460,000 \ 200,000 Total Assets Current Liabilities \ 900,000 \ 200,000 Bonds Payable \ 500,000 \ 100,000 Common Shares \ 500,000 \ 200,000 Retained Earnings \ 400,000 \ 300,000 Total Liabilities and Equity \ \ Also on December 31, 2020 (after the financial statements appearing above had been prepared) Chompster Inc., one of Whine's main competitors has agreed to acquire an equity interest in Dine Inc. As a result of the agreement, Dine Inc. would issue another 8,000 shares (over and above the 32,000 shares it currently has outstanding) to Chompster for $20 per share. The acquisition differential on the date of acquisition was attributed entirely to equipment, which had a remaining useful life of ten years from the date of acquisition. Whine Inc. uses the equity method to account for its investment in Dine Inc. There were no unrealized intercompany profits on December 31, 2020. What would be Whine's ownership interest in Dine following Chompster's purchase of shares in Dine?

Assuming that A acquired a controlling interest in B through numerous small acquisitions, what would be appropriate accounting with respect to these acquisitions?

ABC Inc. purchased 35,000 voting shares out of 123 Inc.'s 50,000 outstanding voting shares for $350,000 on January 1, 2020. On the date of acquisition, 123's common shares and retained earnings were valued at $120,000 and $180,000, respectively. 123's book values approximated its fair values on the acquisition date with the exception of a patent and a trademark, neither of which had been previously recorded. The fair values of the patent and trademark on the date of acquisition were $30,000 and $20,000 respectively. On January 2, 2020, ABC sold 7,000 shares of 123 on the open market for $57,750. ABC Inc. uses the equity method to account for its investment in 123 Inc. What is the amount of undepleted acquisition differential (including goodwill) after the sale?

On January 1, 2019, Hanson Inc. purchased 54,000 voting shares out of Marvin Inc.'s 90,000 outstanding voting shares for $240,000. On that date, Marvin's common shares and retained earnings were valued at $60,000 and $90,000, respectively. Marvin's book values approximated its fair values on the acquisition date with the exception of the company's equipment, which was estimated to have a fair value that was $50,000 in excess of its recorded book value. The equipment was estimated to have a useful life of eight years. Both companies use straight line amortization exclusively. On January 1, 2020, Hanson purchased an additional 9,000 shares of Marvin Inc. on the open market for $45,000. On this date, Marvin's book values were equal to its fair values with the exception of the company's equipment, which is now thought to be undervalued by $60,000. Moreover, the equipment's estimated useful life was revised to 5 years on this date. Marvin's net income and dividends for 2019 and 2020 are as follows: 2019 Net Income Dividends Marvin's goodwill suffered an impairment loss of $5,000 during 2019. Hanson Inc. uses the equity method to account for its investment in Marvin Inc. What is the amount of the acquisition differential amortization (excluding goodwill impairment) for 2020?

On January 1, 2019, Hanson Inc. purchased 54,000 voting shares out of Marvin Inc.'s 90,000 outstanding voting shares for $240,000. On that date, Marvin's common shares and retained earnings were valued at $60,000 and $90,000, respectively. Marvin's book values approximated its fair values on the acquisition date with the exception of the company's equipment, which was estimated to have a fair value that was $50,000 in excess of its recorded book value. The equipment was estimated to have a useful life of eight years. Both companies use straight line amortization exclusively. On January 1, 2020, Hanson purchased an additional 9,000 shares of Marvin Inc. on the open market for $45,000. On this date, Marvin's book values were equal to its fair values with the exception of the company's equipment, which is now thought to be undervalued by $60,000. Moreover, the equipment's estimated useful life was revised to 5 years on this date. Marvin's net income and dividends for 2019 and 2020 are as follows: Net Incorne Dividends Marvin's goodwill suffered an impairment loss of $5,000 during 2019. Hanson Inc. uses the equity method to account for its investment in Marvin Inc. What percentage of Marvin's shares was purchased by Hanson on January 1, 2019?

A Inc. owns 80% of B's outstanding voting shares. Under which of the following scenarios would A's ownership percentage of B change?

Whine purchased 80% of the outstanding voting shares of Dine Inc. on December 31, 2020. The balance sheets of both companies on that date are shown below (after Whine acquired the shares): WHINE DINE Cash \ 250,000 \ 200,000 Accounts Receivable \ 450,000 \ 300,000 Inventory \ 500,000 \ 100,000 Investment in Dine Inc. \ 500,000 Land \ 140,000 Equipment (net) \ 460,000 \ 200,000 Total Assets Current Liabilities \ 900,000 \ 200,000 Bonds Payable \ 500,000 \ 100,000 Common Shares \ 500,000 \ 200,000 Retained Earnings \ 400,000 \ 300,000 Total Liabilities and Equity \ \ Also on December 31, 2020 (after the financial statements appearing above had been prepared) Chompster Inc., one of Whine's main competitors has agreed to acquire an equity interest in Dine Inc. As a result of the agreement, Dine Inc. would issue another 8,000 shares (over and above the 32,000 shares it currently has outstanding) to Chompster for $20 per share. The acquisition differential on the date of acquisition was attributed entirely to equipment, which had a remaining useful life of ten years from the date of acquisition. Whine Inc. uses the equity method to account for its investment in Dine Inc. There were no unrealized intercompany profits on December 31, 2020. The amount appearing under equipment on the December 31, 2020 consolidated balance sheet would be:

Parrot Company purchased 75% of the outstanding common shares and 50% of the outstanding preference shares of Saltines Inc. on January 1, 2020, on which date the balance sheet and fair values of Saltines' assets and liabilities were as follows: Saltines Inc. Balance Sheet as at December 31, 2019 Book Values Fair Values Cash \ 130,000 \ 130,000 Accounts receivable 120,000 110,000 Inventory 320,000 290,000 Capital assets (net) 720,000 800,000 \ 1,290,000 Current liabilities \ 190,000 \ 190,000 Long-term debt 300,000 300,000 Common shares 300,000 Preferred shares 200,000 Contributed surplus 50,000 Retained earnings 250,000 \ 1,290,000

Which of the following statements pertaining to preferred shares is correct?