In: Accounting
On December 31, Year 5, Par Company purchased 70% of the outstanding common shares of Sub Company for $8,750,000 million in cash. On that date, the shareholders’ equity of Sub consisted of $2 million in common shares and $6 million in retained earnings. For the year ended December 31, Year 10, the income statements for Par and Sub were as follows:
Par | Sub | |
---|---|---|
Sales | $ 24,800,000 | $ 12,000,000 |
Other Income | 4,000,000 | 1,000,000 |
Cost of goods sold | 18,000,000 | 8,200,000 |
Depreciation expense | 3,400,000 | 1,800,000 |
Other expenses | 3,000,000 | 1,200,000 |
Income tax | 1,200,000 | 400,000 |
Net income | 3,200,000 | 1,400,000 |
At December 31, Year 10, the condensed balance sheets for the
two companies were as
follows:
Par | Sub | |
---|---|---|
Current assets | $14,650,000 | $8,800,000 |
Non-current assets | 20,200,000 | 17,400,000 |
Investment in Sub | 8,750,000 | |
Total assets | $43,600,000 | 26,200,000 |
Liabilities | $26,400,000 | 13,800,000 |
Common shares | 4,000,000 | 2,000,000 |
Retained earnings | 13,200,000 | 10,400,000 |
Total liabilities and shareholders equity | $43,600,000 | $26,200,000 |
Other information
1. On December 31, Year 5, Sub had inventory with a fair value that
was $150,000 less
than its carrying value.
2. On December 31, Year 5, Sub had equipment with a fair value that
was $600,000
greater than its carrying value. The equipment had an estimated
remaining useful life of
8 years.
3. Each year, goodwill is evaluated to determine if there has been
a permanent
impairment. Goodwill had a recoverable value of $3,470,000 at
December 31, Year 9
and $3,200,000 at December 31, Year 10.
4. On January 2, Year 8, Sub sold land to Par for $1,200,000. Sub
purchased the land
on January 1, Year 3 for $800,000. In Year 10, Par sold 30% of this
land to an outsider.
5. During Year 10, Sub sold merchandise to Par for $600,000, 75% of
which remains in
Par’s inventory at December 31, Year 10. On December 31, Year 9,
the inventory of Par
contained $100,000 of merchandise purchased from Sub. Sub earns a
gross margin of
30% on its sales.
6. During Year 10, Par declared and paid dividends of $2,600,000,
while Sub declared
and paid dividends of $800,000.
7. Par accounts for its investment in Sub using the cost
method.
8. Both companies pay income tax at the rate of 40%.
Required
a. Calculate the consolidated net income for Year 10
b. Calculate the consolidated retained earnings at January 1, Year
10.
c. Prepare the consolidated financial statements for the year
ended
December 31, Year 10.
d. Prepare the working paper eliminating journal entries for the
intercompany sale of
inventory for Year 10
Hints: Goodwill = $4,050,000; AD left Dec. 31, Year 10 =
$3,425,000; Total
Consolidated assets $64,226,000
a. The consolidated net income for the Year 10 is as follows:
S.No | Particulars | Par Company (Amount $) | Sub Company (Amount $) | Consolidated(Par+Sub) (Amount$) |
Incomes | ||||
1 | Sales | 248,00,000 | 120,00,000 | 368,00,000 |
2 | Other Income | 40,00,000 | 10,00,000 | 50,00,000 |
Total Income (a) | 288,00,000 | 130,00,000 | 418,00,000 | |
Expenditure | ||||
3 | Cost of goods sold | 180,00,000 | 82,00,000 | 262,00,000 |
4 | Depreciation expense | 34,00,000 | 18,00,000 | 52,00,000 |
5 | Other expenses | 30,00,000 | 12,00,000 | 42,00,000 |
6 | Income tax | 12,00,000 | 4,00,000 | 16,00,000 |
Total Expenses (b) | 256,00,000 | 116,00,000 | 372,00,000 | |
Consolidated Net income / (Loss) (a-b) | 32,00,000 | 14,00,000 | 46,00,000 | |
Other Comprehensive Income | ||||
7 | Decrease in the Fair value of Inventory | -150000 | ||
8 | Increase in the Fair value of Equipment | 600000 | ||
9 | Increase in the Fair value of Goodwill ($.4,050,000-$3,200,000) | 850000 | ||
10 | Elimination of Profit margin in inventory | -112500 | ||
($.6,00,000*75%)= $.4,50,000*25% | ||||
11 | Additional depreciation due to change in fair value of equipment | -75000 | ||
($.600,000/8 Years) | ||||
Net Consolidated total income of Par+Sub | 57,12,500 |
b. The following the consolidated balance in retained earnings as of 01st Jan'2020.
Satement of Retained Earnings as on 01st Jan'2020 | ||
S.No | Particulars | Amount($). |
1 | Retained earning in Par Company | 132,00,000 |
2 | Retained earning in Sub Company | 104,00,000 |
Total | 236,00,000 | |
Less: | Profit margin in underlying inventory | -25000 |
($.100,000*25%) | ||
Net Amount in Retained Earnings | 235,75,000 |