Question

On January 1, Year 4, Handy Company (Handy) purchased 70% of the outstanding common shares of Dandy Limited (Dandy) for $7,000. On that date, Dandy’s shareholders’ equity consisted of common shares of $390 and retained earnings of $5,900.

The financial statements for Handy and Dandy for Year 9 were as follows:

BALANCE SHEETS
At December 31, Year 9
	Handy			Dandy
Cash	$	1,480		$	920
Accounts receivable		2,940			1,190
Inventory		3,540			3,060
Property, plant, and equipment—net		4,480			3,150
Investment in Dandy		7,000			—
Total	$	19,440		$	8,320
Current liabilities	$	4,500		$	360
Long-term liabilities		3,240			1,370
Common shares		1,140			390
Retained earnings		10,560			6,200
Total	$	19,440		$	8,320

STATEMENTS OF INCOME AND RETAINED EARNINGS
For year ended December 31, Year 9
		Handy			Dandy
Sales	$	22,600		$	8,140
Cost of sales		15,080			3,560
Gross profit		7,520			4,580
Other revenue		1,760			—
Selling and administrative expenses		(980			(560	)
Other expenses		(5,460	)		(2,180	)
Income before income taxes		2,840			1,840
Income tax expense		1,000			780
Net income		1,840			1,060
Retained earnings, beginning of year		10,560			6,060
Dividends paid		(1,840	)		(920	)
Retained earnings, end of year	$	10,560		$	6,200

Additional Information

• In negotiating the purchase price at the date of acquisition, it was agreed that the fair values of all of Dandy’s assets and liabilities were equal to their carrying amounts, except for the following:

	Carrying Amount	Fair Value
Inventory	$2,240	$2,340
Equipment	2,640	3,140

• Both companies use FIFO to account for their inventory and the straight-line method for amortizing their property, plant, and equipment. Dandy’s equipment had a remaining useful life of 10 years at the acquisition date.
• Goodwill is not amortized on a systematic basis. However, each year, goodwill is evaluated to determine if there has been a permanent impairment. It was determined that goodwill on the consolidated balance sheet should be reported at its recoverable amount of $1,240 on December 31, Year 8, and $1,080 on December 31, Year 9.
• During Year 9, inventory sales from Dandy to Handy were $5,300. Handy’s inventories contained merchandise purchased from Dandy for $2,800 at December 31, Year 8, and $3,900 at December 31, Year 9. Dandy earns a gross margin of 50% on its intercompany sales.
• On January 1, Year 5, Handy sold some equipment to Dandy for $2,400 and recorded a gain of $280 before taxes. This equipment had a remaining useful life of eight years at the time of the purchase by Dandy.
• Handy charges $50 per month to Dandy for consulting services and has been doing so throughout Years 8 and 9.
• Handy uses the cost method of accounting for its long-term investment.
• Both companies pay taxes at the rate of 40%.
• Amortization expense is grouped with selling and administrative expenses, and impairment losses are grouped with other expenses.

Required:

(a) Prepare a consolidated statement of income for the year ended December 31, Year 9. (Input all values as positive numbers. Omit $ sign in your response.)

Handy Company
Consolidated Income Statement
Year 9
Sales	$
Cost of sales
Gross profit
Other revenue
Selling and administrative expense
Other expenses
Income before income taxes
Income tax expense
Net income	$
Attributable to:
Shareholders of Handy
Non-controlling interest
	$

(b-1) Calculate consolidated retained earnings at January 1, Year 9. (Omit $ sign in your response.)

Consolidated retained earnings           $ -----------------

(b-2) Prepare a consolidated statement of retained earnings for the year ended December 31, Year 9. (Amounts to be deducted should be indicated by a minus sign. Omit $ sign in your response.)

Handy Company
Consolidated Statement of Retained Earnings
For the Year Ended December 31, Year 9
(Click to select)  Retained earnings, Dec. 31  Retained earnings, Jan. 1	$
(Click to select)  Add: Net income  Less: Net loss
(Click to select)  Add: Dividends paid  Less: Dividends paid
(Click to select)  Retained earnings, Dec. 31  Retained earnings, Jan. 1	$

(c) Not available in Connect.

(d) Calculate goodwill impairment loss and non-controlling interest on the consolidated income statement for the year ended December 31, Year 9, under the identifiable net assets method. (Input all values as positive numbers. Omit $ sign in your response.)

Goodwill impairment loss	$
Non-controlling interest	$

(e) Prepare the consolidated financial statements using the worksheet approach. (Values in the first two columns and last column (the "parent", "subsidiary" and "consolidated" balances) that are to be deducted should be indicated with a minus sign, while all values in the "Entry" columns should be entered as positive values. For accounts where multiple adjusting entries are required, combine all debit entries into one amount and enter this amount in the debit column of the worksheet. Similarly, combine all credit entries into one amount and enter this amount in the credit column of the worksheet. Leave no cells blank - be certain to enter "0" wherever required. Omit $ sign in your response.)

HANDY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, YEAR 9
			Entries
	Handy	Dandy	Dr.	Cr.	Consolidated
Year 9 income statements
Sales	$	$	$	$	$
Cost of sales
Gross profit
Other revenue
Selling and administrative expense
Other expenses
Income before income taxes
Income tax expense
Profit	$	$			$
Attributable to:
Non-controlling interest					$
Shareholders of Handy
Total			$	$
Year 9 retained earnings statements
Balance, January 1	$	$	$	$	$
Profit
Dividends
Balance, December 31	$	$			$
Total			$	$
Balance Sheet, December 31, Year 9
Cash	$	$	$	$	$
Accounts receivable
Inventory
Property, plant, and equipment—net
Goodwill
Deferred income tax asset
Investment in Dandy
Total	$	$			$
Current liabilities	$	$			$
Long-term liabilities
Common shares
Retained earnings
Non-controlling interest
Total	$	$			$
			$	$

Answer 1

(a)Prepare a consolidated statement of income for the year ended December 31, Year 9. (Input all values as positive numbers.)

Handy Company

Consolidated Income Statement

Year 9

Sales                                                       25,440 ± 1%   

Cost of sales                                          13,890 ± 1%   

Gross profit                                           11,550 ± 1%      

Other revenue                                           516 ± 1%   

Selling & administration expense       1,555 ± 1%   

Other expenses                                      7,200 ± 1%   

  

Income before income taxes               3,311 ± 1%   

Income tax expense                              1,574 ± 1%      

   

Net income                                        $ 1,737 ± 1%   

Attributable to:       

         Shareholders of Handy                 1,581 ± 1%   

          Non­controlling interest                   156 ± 1%

                                                               $ 1,737 ± 1%

(b 1) Calculate consolidated retained earnings at January 1, Year 9

Consolidated retained earnings $ 8,446 ± 1%   

(b 2) Prepare a consolidated statement of retained earnings for the year ended December 31, Year 9. (Amounts to be deducted should be indicated by a minus sign.)

Handy Company

Consolidated Statement of Retained Earnings

For the year ended December 31, Year 9   

Retained earnings, Jan.                  1 $ 8,446 ± 1%      

Add: Net income                                     1,581 ± 1%

                                                                 10,027 ± 1%      

Less: Dividends paid                              ­1,840 ± 1%      

Retained earnings, Dec. 31               $ 8,187 ± 1%   

(c) Not available in Connect.

(d) Calculate goodwill impairment loss and non­controlling interest on the consolidated income statement for the year ended December 31, Year 9, under the parent company extension theory. (Input all values as positive numbers.)

  Goodwill impairment loss     $ 112 ± 1%      

Non­controlling interest         $ 204 ± 1%   

(e) Prepare the consolidated financial statements using the worksheet approach. (Values in the first two columns and last column (the "parent", "subsidiary" and "consolidated" balances) that are to be deducted should be indicated with a minus sign, while all values in the "Elimination" entries columns should be entered as positive values. For accounts where multiple adjusting entries are required, combine all debit entries into one amount and enter this amount in the debit column of the worksheet. Similarly, combine all credit entries into one amount and enter this amount in the credit column of the worksheet. Leave no cells blank ­ be certain to enter "0" wherever required.)

HANDY LTD
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, YEAR 9
Year 9 income statements	Handy	Dandy	Eliminations	Consolidated
Dr	Cr
Sales	22,600 ± 1%	8,140 ± 1%	5,300 ±1%	0 ± 1%	25,440 ± 1%
Cost of sales	15,080 ± 1%	3,560 ± 1%	1,950 ±1%	6,700 ± 1%	13,890 ± 1%
Gross profit	7,520 ± 1%	4,580 ± 1%			11,550 ± 1%
Other revenue	1760 ± 1%	0 ± 1%	1,244 ±1%	0 ± 1%	516 ± 1%
Selling and administrative expense Other expenses	980 ± 1% 5,460 ± 1%	560 ± 1% 2,180 ± 1%	50 ± 1% 160 ± 1%	35 ± 1% 600 ± 1%	1,555 ± 1% 7,200 ± 1%
Income before income taxes	2,840 ± 1%	1,840 ± 1%		0 ± 1%	3,311 ± 1%
Income tax expense	1,000 ± 1%	780 ± 1%	574 ± 1%	780 ± 1%	1,574 ± 1%
Profit	$     1,840 ± 1%	$     1,060 ± 1%			$     1,737 ± 1%
Attributable to: Non­controlling interest			156 ± 1%		$ 156 ± 1%
Shareholders of Handy					1,581 ± 1%
Total			$     9,434 ± 1%	$     8,115 ± 1%
Year 9 retained earnings statements Balance, January 1	$     10,560 ± 1%	$     6,060 ± 1%	$     8,174 ± 1%	$ 0 ± 1%	$     8,446 ± 1%
Profit	1,840 ± 1%	1,060 ± 1%	9,434 ± 1%	8,115 ± 1%	1,581 ± 1%
	12,400 ± 1%	7,120 ± 1%			10,027 ± 1%
Dividends	1,840 ± 1%	920 ± 1%	0 ± 1%	920 ± 1%	1,840 ± 1%
Balance, December 31	$     10,560 ± 1%	$     6,200 ± 1%			$     8,187 ± 1%
Total			$     17,608 ± 1%	$     9,035 ± 1%
Balance Sheet, December 31, Year 9 Cash	$     1,480 ± 1%	$ 920 ± 1%	$ 0 ± 1%	$ 0 ± 1%	$     2,400 ± 1%
Accounts receivable	2,940 ± 1%	1,190 ± 1%	0 ± 1%	0 ± 1%	4,130 ± 1%
Inventory	3,540 ± 1%	3,060 ± 1%	0 ± 1%	1,950 ± 1%	4,650 ± 1%
Property, plant, and equipment—net	4,480 ± 1%	3,150 ± 1%	285 ± 1%	190 ± 1%	7,725 ± 1%
Goodwill			1,240 ± 1%	160 ± 1%	1,080 ± 1%
Deferred income tax asset			836 ± 1%	14 ± 1%	822 ± 1%
Investment in Dandy	7,000 ± 1%	0 ± 1%	3,054 ± 1%	10,054 ± 1%	0 ± 1%
Total	$     19,440 ± 1%	$     8,320 ± 1%			$     20,807 ± 1%
Current liabilities	$     4,500 ± 1%	$ 360 ± 1%	0 ± 1%	0 ± 1%	$     4,860 ± 1%
Long­term liabilities	3,240 ± 1%	1,370 ± 1%	0 ± 1%	0 ± 1%	4,610 ± 1%
Common shares	1,140 ± 1%	390 ± 1%	390 ± 1%	0 ± 1%	1,140 ± 1%
Retained earnings	10,560 ± 1%	6,200 ± 1%	17,608 ± 1%	9,035 ± 1%	8,187 ± 1%
Non­controlling interest			276 ± 1%	2,286 ± 1%	2,010 ± 1%
Total	$     19,440 ± 1%	$     8,320 ± 1%			$     20,807 ± 1%
			$     23,689 ± 1%	$     23,689 ± 1%

Consolidated Income Statement Year 9

Sales ($22,600 + $8,140 – (j) $5,300)                                                 = $25,440

Cost of sales ($15,080 + $3,560 – (j) $5,300 + (e) $1,950 – (d) $1,400)	=	13,890
Other revenue (1,760 + $0 – (m) $644 – (k) $600)	=	516
Selling & admin expense ($980 + $560 + (a) $50 – (h) $35)	=	(1,555)
Other expenses ($5,460 + $2,180 + (b) $160 – (k) $600)	=	(7,200)
Income tax expense ($1,000 + $780 + (d) $560 – (e) $780 + (h) $14)	=	1,574
NCI (30% × $520)	=	1,737

Calculation of consolidated retained earnings – Jan. 1, Year 9

Handy’s retained earnings	$10,560
Unrealized gain on sale of equipment – net of tax                                (g)	(84)
Subtotal	10,476
Dandy’s retained earnings, beginning of Year 9                     $     6,060
Dandy’s retained earnings, at acquisition                                    5,900
Change in retained earnings since acquisition                                160
Cumulative differential amortization and impairment     (c)            (2,220)
Unrealized profit in beginning inventory                      (d)               (840)
(2,900)
Handy’s share @ 70%	(2,030)
Consolidated retained earnings	$ 8,446

(d)

Goodwill impairment loss under entity theory                                $ 160

Less: NCI’s share (30%)                                                                 48

Goodwill impairment loss under parent company extension theory $ 112

NCI on income statement under entity theory                                $ 156

Add: NCI’s share of goodwill impairment (30%)                                  48

NCI on income statement under parent company extension theory $ 204

(e)

Journal Entries

1	1 Retained earnings (note a)	$ 2,114
	Investment in Dandy		$ 2,114
	To adjust retained earnings to equity method at beginning of year
2	2 Investment in Dandy	2,130
	Non­controlling interest (note b)		2,130
	To establish non­controlling interest at beginning of year
3	3 Common shares	390
	Retained earnings	6,060
	Equipment	250
	Goodwill	1,240
	Investment in Dandy		7,940
	To eliminate subsidiary's shareholders' equity and establish acquisition differential at beginning of Year 9
4	4 Goodwill impairment	160
	Goodwill		160
	Amortization expense	50
	Property, plant & equipment – net		50
	To amortize the acquisition differential for Year 9
5	5 Dividend income	644
	Dividends paid		644
	To eliminate dividends from subsidiary
6	6 Other revenue	600
	Other expenses		600
	To eliminate consulting revenue and expenses
7	7 Sales	5,300
	Cost of sales		5,300
	To eliminate intercompany sales
8	8 Investment in Handy	840
	Cost of sales		1,400
	Income tax expense	560
	To eliminate unrealized profits in beginning inventory
9	9 Cost of sales	1,950
	Inventory		1,950
	Deferred income tax asset	780
	Income tax expenses		780
	To eliminate unrealized profits in ending inventory
10	10 Investment in Handy	84
	Deferred income tax asset	56
	Equipment ­ net		140
11	11 Income tax expense	14
	Deferred income tax asset To eliminate excess depreciation from intercompany gain on sale of equipment		14
12	12 Non­controlling interest­P&L	156
	Non­controlling interest­SFP		156
	To record NCI's share of income for the year
13	13 Non­controlling interest­SFP	276
	Dividends paid (30% x 920)		276
	To record NCI's share of dividends paid
	Total of debits and credits	$ 23,689	$ 23,689

Notes

a Consolidated retained earnings, beginning of Year 9 (= Handy's retained earnings,
beginning of Year 9 under equity method)	$ 8,446
Handy's retained earnings, beginning of Year 9 under cost method	10,560
Difference between cost and equity method, beginning of Year 9	$ (2,114)
b Dandy's common shares	$       390
Dandy's retained earnings	6,200
Unamortized acquisition differential	1,280
Ending inventory	(1,170)
Dandy's adjusted shareholders' equity	6,700
NCI's share	30%
NCI, end of Year 9	2,010
Less: NCI's share of consolidated net income for Year 9	156
Add: NCI's share of Dandy's dividends for Year 9	276
NCI, beginning of Year 9	$ 2,130