Prawn Corporation Owns 80% of the Outstanding Voting Shares of Shrimp

Essay

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 for 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 3, $20X 6$
(In thousands of $\$'$ s) $$\begin{array} { l l l } & \text {Prawn } & \text { Shrimp } \\\text { Sales } & \$ 600 & \$ 250 \\\text { Gain on sale of land and buildings } & & 70 \\\text { Dividend income } & \underline { 40 } & \underline { 0} \\\text { Total revenue }& \underline { 6 4 0 } & \underline { 3 2 0 }\end{array}$$ $\begin{array}{lll}\text { Cost of goods sold } & 380 & 134 \\\text { Operating expenses } & \underline{164} & \underline{80} \\\text { Total expenses } & \underline{544} & \underline{214} \\\text { Net Income } & \underline{ \$ 96} & \underline{ \$ 106}\end{array}$
Statement of Changes in Equity-Partial-Retained Earnings section
Year Ended December 3,20X6
(In thousands of $\$'$ s) $$\begin{array} { l l l } & \text { Prawn } & \text { Shrimp } \\\text { Opening retained earnings } & \$ 400 & \$ 100 \\\text { Net income } & 96 & 106 \\\text { Dividends } & \underline { ( 100 ) } & \underline { ( 40 ) } \\\text { Ending retained eamings } & \underline {\underline { \$ 3 9 6 }} & \underline { \underline { \$ 166 } }\end{array}$$ The balance of the land and buildings at December 31, 20X6, for Prawn totalled $895,000 and for Shrimp totalled $450,000.
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:
$$\begin{array} { l l l } & \$ 20X5 & \$ 20X6 \\\text { Sales by Prawn to Shrimp } & \$ 40,000 & \$ 60,000 \\\text { Inventory not yet sold at end of year }& \$ 20,000 & \$ 35,000\end{array}$$ $\begin{array}{lll}\text { Sales by Shrimp to Prawn } & \$ 50,000 & \$ 50,000 \\\text { Inventory not yet sold at end of year } & \$ 10,000 & \$ 40,000\end{array}$
Profit margins on sales by Prawn to Shrimp are 40%.
Profit margins on sales by Shrimp to Prawn are at 30%.
Required:
Calculate the following consolidated balance as at December 31, 20X6:
a. Retained earnings
b. Land and buildings