In: Accounting
On Jan 1, 2016, PORE Inc. purchased 80% of the voting shares of SCORE Inc. for $900,000 cash, plus a commitment to pay an additional $300,000 in three years if sales grow by more than 20% over the next three years. An independent business valuator stated that PORE Inc. could have paid an extra $100,000 at the date of acquisition instead of agreeing to a potential payment of $300,000 in three years.
On the date of acquisition, SCORE’s Common Stock and Retained Earnings were valued at $200,000 and $600,000 respectively. PORE uses the cost method to account for its investment.
SCORE’s fair values approximated its carrying values with the following exception:
The equipment had a fair value that was $ 100,000 higher than its carrying value, and was estimated to have a remaining useful life of 10 years from the date of acquisition with no salvage value.
SCORE’s inventory had a fair value that was $2,000 more than book value. SCORE sold this inventory in 2016.
SCORE had an internally developed patent that had a fair value of $20,000 and can be used for four years. SCORE did not include the value of the patent on its financial records.
Both companies use straight line amortization exclusively for all assets and liabilities if applicable.
The effective tax rate for both companies is 40%.
The Financial Statements of PORE & SCORE for the Year ended December 31, 2019 are shown below:
Income Statements
PORE Inc. SCORE Inc.
Sales $1,110,000 $530,000
Other Revenues $400,000 $160,000
Less: Expenses:
Cost of Goods Sold: $800,000 $330,000
Depreciation Expense $30,000 $20,000
Other Expenses $110,000 $150,000
Income Tax Expense $170,000 $50,000
Net Income $400,000 $140,000
Retained Earnings Statements
Balance, Jan 1, 2019 $1,020,000 $760,000
Net Income $400,000 $140,000
Less: Dividends ($260,000) ($100,000)
Retained Earnings $1,160,000 $800,000
Balance Sheets
PORE Inc. SCORE Inc.
Cash $300,000 $240,000
Accounts Receivable 300,000 395,000
Inventory 250,000 175,000
Investment in SCORE Inc. 900,000 -
Land 80,000 70,000
Equipment (net) 220,000 210,000
Total Assets $2,050,000 $1,090,000
Current Liabilities $270,000 $90,000
Bonds Payable 220,000 -
Common Shares 400,000 200,000
Retained Earnings 1,160,000 800,000
Total Liabilities and Equity $2,050,000 $1,090,000
Other Information:
REQUIRED
c) Prepare the consolidated financial statements under the fair value enterprise method: Income statement and Retained Earnings for the year ended December 31st, 2019, and Balance Sheet as at December 31st, 2019. Show all supporting calculations.
solution:
Relised And Unrelised intercompny Profits Related to
1. Plant And Machinery
2016=$70000/7=$10000*3=$30000
carrying value on Plant And machinery=$40000
2019=sale to PORE=$80000-$40000
Relised profit From score 80%=$32000
unrelised Profit=$8000
2.profits on sale of land=$95000-$80000
=$15000
Relised profit Pore=$15000*20%=$3000
Unrelised Profit from Score=$15000*80%=$12000
3.Inventory
cost of good sold =$60000
% of profit=$20000/$80000=25%
40% of inventory Remain unsold =$80000*40%=$32000
unrelised Profit=$32000*25%=$8000
Relised Profit=$48000*25%=$12000
Total RElised profit=$47000
Total unrelised profit=$28000
Before Tax profit=$19000
After Tax profit=$19000*60%=$11400
c
Calculate the acquistion Differential, Goodwill and NCI at
acquistion
Cost of 80% of Score (900000+100000 Contingent) 10,00,000
Implied 100% Value (1000000/80%) 12,50,000
Carrying amount Common Stock -200000
R/E - 600000 8,00,000
Acquistion differential 4,50,000
Allocation
Equipment 1,00,000
Inventory 2,000
Patent 20,000 1,22,000
Balance: Goodwill 3,28,000
NCI at acquistion 20% x 1250000 2,50,000
Amortization Schedule of the acquistion differential:-
Assets 01-01-2016 2016 / 2017 / 2018 2019 31-12-2019
Equipment 1,00,000 30,000 10,000 60,000
Inventory 2,000 2,000 - -
Patent 20,000 15,000 5,000 -
Goodwill 3,28,000 50,000 35,000 2,43,000
Total 4,50,000 97,000