Question

FINAL COMPREHENSIVE TEST

The following financial statements were prepared on December 31, 2019:

                                                                                    Post Inc.                     Stamp Inc.

Cash                                                             $     85,000                  $     45,000
Inventory                                                           225,000                         55,000

Property, plant & equipment                             405,000                       595,000

Investment in Stamp Inc. – at cost                   800,000                                 -

Total Assets                                               $1,515,000                  $   695,000

Current Liabilities                                          $   68,000                  $     91,000

Common Shares                                               875,000                       310,500

Retained Earnings                                            572,000                       293,500

Total Liabilities and Equity                       $1,515,000                  $   695,000
  

                                                                                  Post Inc.                      Stamp Inc.

Sales                                                          $   890,000                    $   305,000
Gain on Sale of Land                                      60,000                                   -

Dividend income                                             40,000                                   -

                                                                        990,000                         305,000

Cost of sales                                                  495,000                         125,000

Amortization expenses                                   87,000                           15,000

Administrative expense                                  22,000                           11,000

Income tax expense                                         50,000                         25,000

Net Income                                               $   336,000                     $ 129,000

Additional Information:

• Post purchased 80% of the outstanding voting shares of Stamp for $800,000 on January 1, 2017, at which time Stamp’s retained earnings were $45,500, and common shares were $310,500. The fair values of Stamp’s net asset were equal to their fair value, except for the following:
  • Inventory = fair value was $7,000 greater than book value
  • Equipment = fair value was $350,000 greater than book value - equipment had a remaining useful life ten years

• During 2019, a goodwill impairment loss of $20,000 was recognized. Impairments are grouped with amortization expense.

• During 2019, inventory sales from Stamp to Post were $25,000. At the end of the year, Post’s inventories contained merchandise purchased from Stamp for $20,000. A gross margin of 30% is recognized on its intercompany sales.

• During 2019, Post sold a parcel of land to Stamp for $155,000. Post recorded a gain of $60,000 before taxes.

• Stamp paid out $50,000 in dividends and Post recorded $40,000 ($50,000 * 80%) of dividend revenue in 2019. Any impairment losses are grouped with administrative expenses.

• Assume a 40% tax rate

Required:

1. Calculate the amount of the acquisition differential and the amount of goodwill arising from this combination. Also, state any intercompany items/transactions.
2. Calculate:
   1. Consolidated Net Income as well as the Amount Attributable to NCI and the Amount Attributable to Post’s Shareholders for the year ended December 31, 2019
   2. Consolidated NCI on the Balance Sheet at December 31, 2019
   3. Consolidated Sales for the year ended December 31, 2019
   4. Consolidated Cost of Goods Sold for the year ended December 31, 2019
   5. Consolidated Income Tax Expense for the year ended December 31, 2019 (2 mark)
   6. Consolidated Equipment on the Balance Sheet at December 31, 2019

Answer 1

Solution
Working Note1.
Calculations of fair value of Net Assets of Stamp Incorp as on 01.01.2017 and Goodwill
Particulars	Amount
Common Shares	$3,10,500.00
Retained Earning	$45,500.00
Change in Far Value Of assets
Inventory	$7,000.00
Equipment	$3,50,000.00
Fair Value of assets(A)	$7,13,000.00
80% of faire value of net assets,(B)	$5,70,400.00
Consideration for purchasing 80% holding in Stamp Inco.(C)	$8,00,000.00
Acquisition Difference D=(B-C)	$2,29,600.00
Good will D/.80	$2,87,000.00
Working Note 2
Good will	$10,00,000.00
Impairments on goodwill	$20,000.00
Balance of goodwill as on 31 Dec 2019	$9,80,000.00
Working Note 3 calculation of consolidated revenue and NCI share
Particulares	Post	Stamp
Net Income as given in question	$3,36,000.00	$1,29,000.00
Adjustment
Inventory (upward Transaction adjustments)	$3,600.00	-$3,600.00
Sale of Land ((-60000)*0.6)	-$36,000.00	$0.00
Dividend Paid	$0.00	-$50,000.00
	$3,03,600.00	$75,400.00
Non controlling Interest		$15,080.00
Share of Post Incorporation @80%		$60,320.00
Post's Net Income	$3,03,600.00
Add Share of Post Incorporation in Stamp Incop 's Net Income	$60,320.00
Post Incorporation Net Income	$3,63,920.00
Less Impairments of Goodwill	$16,000.00
Post share in consolidated revenue	$3,47,920.00
Non Controlling Interest in stamp's net income after adjusments	$15,080.00
Less Impairments of Goodwill	$4,000.00
NCI share in consolidated revenue	$11,080.00
Consolidated Net Income	$3,59,000.00
A. Amount of acquisitional Difference and the Amopount of goodwill
Refer working Note-1
Acquisition Difference	$2,29,600.00
Good will	$2,87,000.00
B. (i) ( refer working note 3)
Consolidated Net Income	$3,59,000.00
Amount Attributable to NCI	$11,080.00
Post share in consolidated revenue	$3,47,920.00
B. (ii)
Consolidate NCI
Retained Earining as on 31 dec 2019	$2,93,500.00
Less Adjustments( inventory)	-$3,600.00
	$2,89,900.00
NCI share in stamp earning	$57,980.00
Less- imparments on goodwill( 20000*.20)	-$4,000.00
Consolidate NCI	$53,980.00
B(iii)
Consolidate Sales
Post Incop Sales	$8,90,000.00
Stamp Incorp sales	$3,05,000.00
Less Sold to past incorporation	-$20,000.00
Consolidate Sales	$11,75,000.00
B.(iv)
Consolidated good sold
Post Incop	$4,95,000.00
Stamp Incorp	$3,05,000.00
Less Adjustments of good sold to post incorporation	$14,000.00
Consolidate Sales	$8,14,000.00