Question

In: Accounting

On December 31, Year 5, Par Company purchased 70% of the outstanding common shares of Sub...

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

Solutions

Expert Solution

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

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