Question

Question 2                                                                                     

On January 1, 2015, Portia Ltd. issued shares worth $1,120,000 to Storm Ltd. to acquire 80% of Storm’s outstanding shares. On the acquisition date, Storm’s statement of financial position shows share capital of $420,000 and retained earnings of $777,000. At the acquisition date, all of Storm’s identifiable assets and liabilities equaled their fair values with the exception of the following:

         

          Inventories (fair value exceeded book value by $14,000)

          Investments (fair value exceeded book value by $14,000)

          Equipment (fair value exceed net book value by $105,000)

At the acquisition date, Storm’s accumulated amortization account for the equipment had a balance of $805,000. As of the acquisition date, Storm’s equipment had a remaining useful life of 10 years.

Additional information:

Portia records its investments using the cost method.

Portia uses the entity theory method of consolidation.

In 2017, Portia sold all its investments for a gain of $63,000.

In 2018, Portia purchased equipment from Storm for $127,400. At the sale date, Storm’s net book value of the equipment was $98,000. Storm had originally purchased the equipment for $140,000. After the purchase, Portia amortized the equipment at a rate of $18,200 per year for the remaining 7 years of its useful life, taking a full year of amortization in 2018.

During 2019, Storm purchased goods from Portia. At the end of 2019, Storm still had $28,000 of these goods in inventory. Portia had earned a gross margin of 40% on the sale. The goods were sold to external customers in 2020.

During 2019, Portia purchased goods from Storm. At the end of 2019, Portia still had $140,000 of these goods in inventory. Storm had earned a gross margin of 40% on the sale. The goods were sold to external customers in 2020.

During 2020, Portia sold goods of $140,000 to Storm. Portia earned a gross profit of $56,000 on this sale. At the end of 2020, Storm still had $56,000 worth of goods in inventory.

During 2020, Storm sold goods of $980,000 to Portia at a gross margin of 40%. At the end of 2020, Portia still had 10% of the goods in inventory.

During 2020, Portia received $126,000 in royalties from Storm. Between January 1, 2015 and December 31, 2019, Portia received $700,000 in royalties from Storm.

The financial statements for Portia and Storm for the year ended December 31, 2020 are presented on the following pages.

Statement of Financial Position

As of December 31, 2020

                                                                                                      Portia Ltd.      Storm Ltd.

Assets:

Current assets:

Cash                                                                                      $        70,000    $       28,000

Accounts receivable                                                                   210,000             224,000

Inventory                                                                                       252,000             140,000

                                                                                                      532,000             392,000

Noncurrent assets:

Land                                                                                             140,000                   -

Equipment                                                                                 7,000,000        3,780,000

Accumulated amortization, equipment                      (2,478,000)       (1,736,000)

Investment in Storm                                                                  1,120,000           ____-___

                                                                                                    5,782,000        2,044,000

Total assets                                                                           $ 6,314,000     $ 2,436,000

Liabilities and shareholders’ equity:

Current liabilities:

Accounts payable                                                                 $     630,000     $    280,000

Noncurrent liabilities:

Loan payable                                                                               420,000             700,000

                                                                                                    1,050,000             980,000

Shareholders’ equity:

Share capital                                                                             1,680,000             420,000

Retained earnings                                                                    3,584,000        1,036,000

                                                                                                    5,264,000        1,456,000

                                                                                                 $ 6,314,000     $ 2,436,000

Condensed Statement of Comprehensive Income

For the year ended December 31, 2020

                                                                                          Portia Ltd.      Storm Ltd.

Revenue:

            Sales                                             $ 2,804,200   $ 2,100,000

            Royalties                                            210,000                -

            Dividends                                           100,800      ____-___

                                                                      3,115,000      2,100,000

                  Expenses:

                              Cost of sales                                   1,680,000      1,260,000

                              Other                                                   784,000        575,400

                                                                                        2,464,000      1,835,400

                  Net and comprehensive income          $    651,000   $    264,600

Statement of Changes in Equity – Retained Earnings Section

For the year ended December 31, 2020

                                                                                                      Portia Ltd.      Storm Ltd.

Retained earnings, beginning of the year                           $ 3,353,000 $    897,400

Net income                                                                                   651,000         264,600

Dividends declared                                                                    (420,000)      (126,000)

Retained earnings, end of year                                $ 3,584,000 $ 1,036,000

Required:

Prepare Portia’s consolidated financial statements for the year ended December 31, 2020. Be sure to show all your supporting calculations.

Answer 1

SOLUTION:

**As tax rate is not given in this question, tax calculations have been calculated @ 40%**

Goodwill Calculations at date of Acquisition:

Implied Value of Storm
($1,120,000/0.80)                                 $1,400,000

Minus: Storm Carrying Amount
Share Capital             $420,000

Retained Earnings:    777,000              $1,197,000

                                                                   $203,000

Minus: Differential in Acquisition
Inventory:        14,000
Investments:    14,000
Equipment:      105,000                         $133,000

Amount of Good Will                                                  $70,000

Inventory Acquisition Differential Depreciation Schedule:

Jan 1, 2015 – Supposing that all inventory sold before 2020, the Inventory Acquisition differential would decrease to $0
$14,000 - $14,000 = 0

Investments Acquisition Differential:
Investments sold in 2017 equals $63,000
$14,000 – 63,000 = ($49,000)
It results to an impairment to Goodwill

Goodwill Impairment 2017: $70,000 – 49,000 = $21,000

Equipment: Acquisition differential $105,000/10 = $10,500/yr

Sale of Equipment gain: $127,400 – $98,000 = $29,400
Amortized over 7 years computed as: $29,400/7 = $4,200 per year

Yearly consequences:

Equipment: Upstream Transaction

2018	Amount Before Tax	Tax (40%)	After Tax
Gain on sale of Equipment	$29,400	-$11,760	$17,640
Depreciation	-$4,200	$1,680	-$2,520
Total Intercompany gain	$25,200	-$10,080	$15,120
2019	Amount Before Tax	Tax (40%)	After Tax
Gain on sale of Equipment	$25,200	-$10,080	$15,120
Depreciation	-$4,200	$1,680	-$2,520
Total Intercompany Gain	$21,000	-$8,400	$12,600
2020	Amount Before Tax	Tax (40%)	After Tax
Gain on sale of Equipment	$21,000	-$8,400	$12,600
Depreciation	-$4,200	$1,680	-$2,520
Total Intercompany Gain	$16,800	-$6,720	$10,800

Decline in Accumulated Depreciation Account: $140,000 – 98,000 = $42,000

Amortization

                        Balance                 Depreciation/Impairment Balance

                        Jan 1, 2015           2015-2019           2020           Dec 31,2020

Inventory                   $14,000                $14,000                -                  -

Investment       $14,000                $14,000                -                  -

Equipment        $105,000              $52,500                $10,500      $42,000

Goodwill           $70,000                $49,000                -                  $21,000

Totals               $203,000              $129,500              $10,500      $63,000

Portia Selling Inventory Computations:

                                      Before Tax             40% Tax               After Tax

Opening Inventory                   $8,000                  $3,200                  $4,800

(28,000/1.4=20,000 cost, $8,000 profit)

Ending Inventory            $22,400                $8,960                  $13,440

          (56,000/140,000*56,000 = $22,400 Unrealized profit)

Storm Selling Inventory Computations:

                                      Before Tax             40% Tax               After Tax

Opening Inventory                   $40,000                $16,000                $24,000

(140,000/1.4=100,000 cost, profit = $40,000)

Ending Inventory            $39,200                $15,680                $23,520

(980,000*0.10*0.4= $39,200)

Royalties:

Before Tax             40% Tax               After Tax

2015-2019           $700,000              $280,000              $420,000

Year 2020             $126,000              $50,400                $ 75,600

Total Amount         $826,000              $330,400              $495,600

Potria Ltd

Consolidated Condensed Statement of Comprehensive Income

Net and Comprehensive Income Portia Ltd:                                           $651,000

Minus: Royalties from Storm          (75,600)

            Profit in Ending Inventory (13,440)                                             ($89,040)

Plus: Adjusted Depreciation          2,520

        Profit Opening Inventory        4,800                                                       $7,320

Portia Adjusted Net and Comprehensive Income                                  $569,280

Net and Comprehensive Income Storm Ltd:                   $264,600

Minus: Profit in Ending Inventory (23,520)
            Amortization of Differential (10,500)                    (34,020)

Plus: Profit Opening Inventory      24,000                           $24,000

Storm Adjusted Net and Comprehensive Income          $254,580

Portion Attributable to Portia (80%)                                                          $203,664

Consolidated Net Income                                                                           $772,944

Net Income Attributable to NCI                                                                  $50,916

Total                                                                                                               $823,860