Large Ltd. purchased 80% of Small Company on January 1, Year 6, for $620,000, when the...

Large Ltd. purchased 80% of Small Company on January 1, Year 6, for $620,000, when the statement of financial position for Small showed common shares of $430,000 and retained earnings of $130,000. On that date, the inventory of Small was undervalued by $43,000, and a patent with an estimated remaining life of five years was overvalued by $64,000.

Small reported the following subsequent to January 1, Year 6:

	Profit (Loss)	Dividends
Year 6	92,000	28,000
Year 7	(38,000)	13,000
Year 8	93,000	43,000

A test for goodwill impairment on December 31, Year 8, indicated a loss of $19,600 should be reported for Year 8 on the consolidated income statement. Large uses the cost method to account for its investment in Small and reported the following for Year 8 for its separate-entity statement of changes in equity:

Retained earnings, beginning	530,000
Profit	230,000
Dividends	(67,000)
Retained earnings, end	693,000

Required:

(a) Prepare the cost method journal entries of Large for each year (Years 6, 7, and 8).

(b) Compute the following on the consolidated financial statements for the year ended December 31, Year 8:

- (i) Goodwill

- (ii) Non-controlling interest on the statement of financial position

- (iii) Retained earnings, beginning of year

- (iv) Profit attributable to Large’s shareholders

- (v) Profit attributable to non-controlling interest

Expert Solution

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Cost of 80% investment		$ 620,000
Implied cost of 100% investment		$ 775,000

Ordinary shares	$ 430,000
Retained earnings	$ 130,000	$ 560,000
Acquisition differential – Jan. 1, Year 6		$ 215,000
Allocated:
Inventory	$ 43,000
Patents	$ (64,000)	$ (21,000)
Balance – goodwill		$ 236,000

	Balance			Balance
	Jan. 1 Year 6	Amortization Year 6 and 7	Year 8	Dec. 31 Year 8

Inventory	$ 43,000	$ 43,000
Patents	$ (64,000)	$ (25,600)	$ (12,800)	$ (25,600)
Goodwill	$ 236,000	$ -	$ 19,600	$ 216,400
	$ 215,000	$ 17,400	$ 6,800	$ 190,800

PART a
	Year 6		Year 7		Year 8
Investment in Small	$ 620,000
Cash		$ 620,000
Cash	$ 22,400		$ 10,400		$ 34,400
Dividend income		$ 22,400		$ 10,400		$ 34,400

PART b

(i) Goodwill		$ 216,400
(ii) Small’s ordinary shares		$ 430,000
Small’s retained earnings:
Beginning Retained Earning	$ 130,000
Year 6 Net Income	$ 92,000
Year 7 Net Income	$ (38,000)
Year 8 Net Income	$ 93,000
Year 6 Dividend	$ (28,000)
Year 7 Dividend	$ (13,000)
Year 8 Dividend	$ (43,000)	$ 193,000
Unamortized acquisition differential		$ 190,800
		$ 813,800
NCI Share 20%		$ 162,760

(iii)
Large’s retained earnings			$ 530,000
Beginning Retained Earning	$ 130,000
Year 6 Net Income	$ 92,000
Year 7 Net Income	$ (38,000)
Year 6 Dividend	$ (28,000)
Year 7 Dividend	$ (13,000)	$ 143,000
Small’s retained earnings, date of acquisition		$ (130,000)
Change since acquisition		$ 13,000
Less: cumulative amortization of acquisition differential		$ (17,400)
Adjusted change since acquisition		$ (4,400)
Large’s share (80%)			$ (3,520)
Consolidated retained earnings			$ 526,480

(iv)
Large’s profit		$ 230,000
Less: dividends from Small (43,000 x80%)		$ (34,400)
			$ 195,600
Small’s profit		$ 93,000
Less: amortization of acquisition differential		$ (6,800)
		$ 86,200
Large’s share (80%)			$ 68,960
Consolidated profit attributable to Large’s shareholders			$ 264,560

(v)
NCI on income statement (86,200 x 20%)			$ 17,240

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