Question

On May 1, 2013, Peat Co. purchased all of Sorbet Ltd.’s issued common shares for $630,000. At the acquisition date, Sorbet’s financial statements included the following balances:

                   Share capital                                     $400,000

                        Retained earnings                            210,000

                        Goodwill                                                 10,000

At the acquisition date, Sorbet’s identifiable assets and liabilities were equal to their fair values, except in the case of inventory that had a book value of $80,000 and a fair value of $86,000, and equipment that had a book value of $360,000 and a fair value of $370,000. The equipment was originally purchased for $480,000. At the acquisition date, the equipment had a remaining useful life of 5 years and was amortized using the straight-line method. All the inventory that Sorbet had on hand at the acquisition date was sold by October 2013. Sorbet’s goodwill has not shown indications of impairment. Both Peat and Sorbet have April 30^th year-ends and did not have any intercompany sales with each other.

The financial statements for Peat and Sorbet at April 30, 2015 are presented on the following pages.

Statement of Financial Position

April 30, 2015

                                                                                                            Peat Co.         Sorbet Ltd.

Assets:

Current assets:

Cash                                                                                           $       52,000           $ 161,600

Accounts receivable                                                                         100,000               80,000

Inventory                                                                                             120,000             170,000

                                                                                                            272,000             411,600

Non-current assets:

Equipment, net                                                                                  558,000             368,000

Furniture and fixtures, net                                                                 51,000               51,600

Investment in Sorbet Ltd.                                                                  630,000                   -

Goodwill                                                                                             ___-___             10,000

                                                                                                        1,239,000             429,600

Total assets                                                                                $ 1,511,000          $ 841,200

Liabilities and shareholders’ equity:

Current liabilities:

Accounts payable                                                                      $      69,000           $   19,600

Non-current liabilities:

Loan payable                                                                         22,000               32,000

Total liabilities                                                                                   91,000               51,600

Shareholders’ equity:

Share capital                                                                                 1,000,000             400,000

Retained earnings                                                                            420,000             389,600

                                                                                                        1,420,000             789,600

Total liabilities and shareholders’ equity                                 $ 1,511,000          $ 841,200

Condensed Statement of Income

For the year ended April 30, 2015

                                                                                               

                                                                                                            Peat Co.         Sorbet Ltd.

Sales                                                                                              $ 250,000          $ 180,000

Expenses                                                                                           170,000             130,000

Net income                                                                                    $   80,000           $   50,000

Statement of Changes in Equity

For the year ended April 30, 2015

                                                                                                            Peat Co.         Sorbet Ltd.

Share capital                                                                              $ 1,000,000          $ 400,000

Retained earnings, May 1, 2014                                                     340,000             339.600

Net income                                                                                        80,000               50,000

Retained earnings, April 30, 2015                                                  420,000             389,600

Total shareholders’ equity                                                         $ 1,420,000          $ 789,600

Required:

Prepare Peat’s consolidated financial statements for April 30, 2015. Ignore income taxes.

Answer 1

Calculation of Goodwill:

Description		Amount in $
Purchase price		630,000
Less: Book Value of acquisition
Share capital	400,000
Retained Earnings	210,000	610,000
Excess Value		20,000
Less: Excess Value assigned to Inventory taken over book value	(86,000-80,000)	6,000
Less: Excess Value assigned to equipment taken over book value	(370,000-360,000)	10,000
Balance in Goodwill		4,000

100% AAP Amortization Dr (Cr)
Assets	Original Value	Life	Amortization per year (Original value/life)	May’13- Apr’14	May 14 – Apr’15
Equipment	10,000	5	2,000	2,000	2,000
Inventory1	6,000			6,000
Goodwill2	4,000			0	0
Total	20,000			8,000	2,000

Notes:

1. Inventory is sold in the same year of acquisition that’s why it is shown as amortized in the year of May’13 to Apr ‘14

2. Goodwill is not impaired

100% AAP Unamortized Dr (Cr)

Assets	Original Value As on 1st May 2013	Amortization per year (Original value/life)	Value at the end of May 2014	May 14 – Apr’15
Equipment	10,000	2,000	8,000	6,000
Inventory1	6,000		0
Goodwill2	4,000		4,000	4,000
Total	20,000		12,000	10,000

1. Value of Net Income Earned

Balance of Retained Earnings of Sorbet as on 1st May 2013	210,000
Balance of Retained Earnings of Sorbet as on 1st May 2014	339,600
Income During the year 2013-2014	129,600
Income During the year 2014-2015	50,000
Total Income	179,600
Less: Goodwill of Sorbet	10,000
Less: Excess Value of Inventory Sold	6,000
Less: Amortization of Equipment for 2 years	4,000
Net Income from Sorbet	159,600

Net Income during the year of Peat co.	80,000
Net Income from Sorbet	159,600
Total Net Income	239,600

Elimination of Investment Account

Investment in Sorbet’s	630,000
Less: Common Stock	400,000
Less: Retained Earning May 1st 2013	210,000
Less: Goodwill	4,000
Less: Inventory May 2013	6,000
Less: Equipment	10,000
Balance Of Investment	$ 0

2. Equipment Balance

Equipment of Peat Co. on April 30th 2015	558,000
Equipment of Sorbet Co. on April 30th 2015	368,000
Add: Addition on acquisition	10,000
Less: Amortization on addition	4,000
Balance	932,000