The Suede Company acquired a $2 million face value bond that has an 8% coupon rate​ (pays interest annually on December​ 31) on January​ 1, 2017. The bond matures on December 31, 2022. On January​ 1, 2017​, the market yield for bonds of equivalent risk and maturity was 6%

Required

Perez Manufacturing Company (PMC) was started when it acquired $92,000 by issuing common stock. During the first year of operations, the company incurred specifically identifiable product costs (materials, labor, and overhead) amounting to $57,200. PMC also incurred $70,400 of engineering design and planning costs. There was a debate regarding how the design and planning costs should be classified. Advocates of Option 1 believe that the costs should be classified as general, selling, and administrative costs. Advocates of Option 2 believe it is more appropriate to classify the design and planning costs as product costs. During the year, PMC made 4,400 units of product and sold 3,600 units at a price of $39.00 each. All transactions were cash transactions.

Required

1. a-1. Prepare a GAAP-based income statement and balance sheet under option 1.

2. a-2. Prepare a GAAP-based income statement and balance sheet under option 2.

3. b. Identify the option that results in financial statements that are more likely to leave a favorable impression on investors and creditors.

4. c. Assume that PMC provides an incentive bonus to the company president equal to 12 percent of net income. Compute the amount of the bonus under each of the two options. Identify the option that provides the president with the higher bonus.

5. d. Assume a 40 percent income tax rate. Determine the amount of income tax expense under each of the two options. Identify the option that minimizes the amount of the company’s income tax expense.

On December 18, 2017, Stephanie Corporation acquired 100 percent of a Swiss company for 4.0 million Swiss francs (CHF), which is indicative of book and fair value. At the acquisition date, the exchange rate was $1.00 = CHF 1. On December 18, 2017, the book and fair values of the subsidiary’s assets and liabilities were: Cash CHF 823,000 Inventory 1,323,000 Property, plant & equipment 4,023,000 Notes payable (2,146,000 ) Stephanie prepares consolidated financial statements on December 31, 2017. By that date, the Swiss franc has appreciated to $1.10 = CHF 1. Because of the year-end holidays, no transactions took place prior to consolidation. Determine the translation adjustment to be reported on Stephanie’s December 31, 2017, consolidated balance sheet, assuming that the Swiss franc is the Swiss subsidiary’s functional currency. What is the economic relevance of this translation adjustment? Determine the remeasurement gain or loss to be reported in Stephanie’s 2017 consolidated net income, assuming that the U.S. dollar is the functional currency. What is the economic relevance of this remeasurement gain or loss?

On January 1, 2021, Marshall Company acquired 100 percent of the outstanding common stock of Tucker Company. To acquire these shares, Marshall issued $295,000 in long-term liabilities and 20,000 shares of common stock having a par value of $1 per share but a fair value of $10 per share. Marshall paid $26,500 to accountants, lawyers, and brokers for assistance in the acquisition and another $11,500 in connection with stock issuance costs.

Prior to these transactions, the balance sheets for the two companies were as follows:

Note: Parentheses indicate a credit balance.

In Marshall’s appraisal of Tucker, it deemed three accounts to be undervalued on the subsidiary’s books: Inventory by $7,550, Land by $17,600, and Buildings by $25,400. Marshall plans to maintain Tucker’s separate legal identity and to operate Tucker as a wholly owned subsidiary.

1. Determine the amounts that Marshall Company would report in its postacquisition balance sheet. In preparing the postacquisition balance sheet, any required adjustments to income accounts from the acquisition should be closed to Marshall’s retained earnings. Other accounts will also need to be added or adjusted to reflect the journal entries Marshall prepared in recording the acquisition.
2. To verify the answers found in part (a), prepare a worksheet to consolidate the balance sheets of these two companies as of January 1, 2021.

Baird Manufacturing Company was started on January 1, 2018, when it acquired $84,000 cash by issuing common stock. Baird immediately purchased office furniture and manufacturing equipment costing $9,800 and $35,100, respectively. The office furniture had an eight-year useful life and a zero salvage value. The manufacturing equipment had a $3,500 salvage value and an expected useful life of four years. The company paid $11,700 for salaries of administrative personnel and $15,300 for wages to production personnel. Finally, the company paid $8,780 for raw materials that were used to make inventory. All inventory was started and completed during the year. Baird completed production on 4,100 units of product and sold 3,140 units at a price of $15 each in 2018. (Assume that all transactions are cash transactions and that product costs are computed in accordance with GAAP.)

a. total product cost? average cost per unit?

b. cost of good sold?

c. ending inventory?

d. net income?

e. retained earning?

f. total asset?

On January 1, 2017, Ridge Road Company acquired 25 percent of the voting shares of Sauk Trail, Inc., for $3,500,000 in cash. Both companies provide commercial Internet support services but serve markets in different industries. Ridge Road made the investment to gain access to Sauk Trail's board of directors and thus facilitate future cooperative agreements between the two firms. Ridge Road quickly obtained several seats on Sauk Trail's board which gave it the ability to significantly influence Sauk Trail's operating and investing activities.

The January 1, 2017, carrying amounts and corresponding fair values for Sauk Trail's assets and liabilities follow:

Also as of January 1, 2017, Sauk Trail's computing equipment had a seven-year remaining estimated useful life. The patented technology was estimated to have a four-year remaining useful life. The trademark's useful life was considered indefinite. Ridge Road attributed to goodwill any unidentified excess cost.

During the next two years, Sauk Trail reported the following net income and dividends:

1. How much of Ridge Road's $3,500,000 payment for Sauk Trail is attributable to goodwill?

2. What amount should Ridge Road report for its equity in Sauk Trail's earnings on its income statements for 2017 and 2018?

3. What amount should Ridge Road report for its investment in Sauk Trail on its balance sheets at the end of 2017 and 2018?

On January 1, 2017, Ridge Road Company acquired 25 percent of the voting shares of Sauk Trail, Inc., for $3,700,000 in cash. Both companies provide commercial Internet support services but serve markets in different industries. Ridge Road made the investment to gain access to Sauk Trail's board of directors and thus facilitate future cooperative agreements between the two firms. Ridge Road quickly obtained several seats on Sauk Trail's board which gave it the ability to significantly influence Sauk Trail's operating and investing activities.

The January 1, 2017, carrying amounts and corresponding fair values for Sauk Trail's assets and liabilities follow:

Also as of January 1, 2017, Sauk Trail's computing equipment had a seven-year remaining estimated useful life. The patented technology was estimated to have a four-year remaining useful life. The trademark's useful life was considered indefinite. Ridge Road attributed to goodwill any unidentified excess cost.

During the next two years, Sauk Trail reported the following net income and dividends:

1. How much of Ridge Road's $3,700,000 payment for Sauk Trail is attributable to goodwill?

2. What amount should Ridge Road report for its equity in Sauk Trail's earnings on its income statements for 2017 and 2018?

3. What amount should Ridge Road report for its investment in Sauk Trail on its balance sheets at the end of 2017 and 2018?

CC Ltd, a company incorporated in Singapore with December 31 year-ends, acquired a retail shop on 2 January 20X1 for $600,000 with the intention of renting it out. The property is leasehold with 20 years remaining on the lease. It has a zero residual value. On 1 July 20X1, CC Ltd rented out the retail shop to an unrelated company for a monthly rental of $8,000, payable at the end of each month. After 2 years, CC Ltd managed to terminate the lease with the existing tenant on 30 June 20X3. CC Ltd used the retail shop for its own operations from 1 July 20X3 onwards.

The market value of CC Ltd’s retail shop was determined as follows:

31 December 20X1     :           $800,000

31 December 20X2     :           $700,000

1 July 20X3                :           $740,000

CC Ltd adopts the fair value model under FRS 40 Investment Property and adopts the cost model under FRS 16 Property, Plant and Equipment. CC Ltd depreciates all its assets on a straight-line basis where applicable.

Required:

Illustrate the accounting for the retail shop by preparing the journal entries (with journal narratives) to record the various events relating to CC Ltd’s retail shop from 2 January 20X1 to 31 December 20X3. Please round your answers to the nearest dollar.

Since CC Ltd adopts fair value, the gain or loss arising from the change in the fair value of the investment property must be recognised in the calculation of profit or loss for the period in which it arises.

On October 30, 2016, Sanchez Company acquired a piece of machinery and signed a 12-month note for $24,000. The face value of the note includes the price of the machinery and interest. The note is to be paid in four $6,000 quarterly installments. The value of the machinery is the present value of the four quarterly payments discounted at an annual interest rate of 16%. Required: 1. Prepare all the journal entries required to record the preceding information including the year-end adjusting entry and any payments. Present value techniques should be used. 2. Show how the preceding items would be reported on the December 31, 2016, balance sheet.

Protrade Corporation acquired 80 percent of the outstanding voting stock of Seacraft Company on January 1, 2017, for $428,000 in cash and other consideration. At the acquisition date, Protrade assessed Seacraft's identifiable assets and liabilities at a collective net fair value of $585,000 and the fair value of the 20 percent noncontrolling interest was $107,000. No excess fair value over book value amortization accompanied the acquisition.

The following selected account balances are from the individual financial records of these two companies as of December 31, 2018:

Each of the following problems is an independent situation:

• Assume that Protrade sells Seacraft inventory at a markup equal to 60 percent of cost. Intra-entity transfers were $96,000 in 2017 and $116,000 in 2018. Of this inventory, Seacraft retained and then sold $34,000 of the 2017 transfers in 2018 and held $48,000 of the 2018 transfers until 2019.
  Determine balances for the following items that would appear on consolidated financial statements for 2018:
• Assume that Seacraft sells inventory to Protrade at a markup equal to 60 percent of cost. Intra-entity transfers were $56,000 in 2017 and $86,000 in 2018. Of this inventory, $27,000 of the 2017 transfers were retained and then sold by Protrade in 2018, whereas $41,000 of the 2018 transfers were held until 2019.
  Determine balances for the following items that would appear on consolidated financial statements for 2018:
• Protrade sells Seacraft a building on January 1, 2017, for $92,000, although its book value was only $56,000 on this date. The building had a five-year remaining life and was to be depreciated using the straight-line method with no salvage value.
  Determine balances for the following items that would appear on consolidated financial statements for 2018: