Suppose there are only two goods in the economy, apples and oranges, and the market basket used to complete the CPI is 8 apples and 4 oranges. Assume the base year is 2018 and suppose you have the following information about prices: January 1, 2018: Price for an apple= $1 Price for an orange= $1 January 1, 2019: Price for an apple= $1.02 Price for an orange= $1.08 Consider an individual receives a fixed income of $36 on January 1st, 2018 and used this to buy 24 apples and 12 oranges.
1. Suppose their income is indexed to the CPI. How much will they receive on January 1, 2019?
2. Since oranges are relatively more costly than apples on January 1, 019, the fixed income recipient may decide to consume more apples. Suppose they choose to consume 30 apples. How many oranges will they consume?
3. Are they happier with the 2018 allocation or the 2019 allocation? Explain.
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1Several years ago Polar Inc. acquired an 80% interest in Icecap Co. The book values of Icecap's asset and liability accounts at that time were considered to be equal to their fair values. Polar’s acquisition value corresponded to the underlying book value of Icecap so that no allocations or goodwill resulted from the transfer.
The following selected account balances were from the individual financial records of these two companies as of December 31, 2018:
| Polar | Icecap | |
| Inc. | Co. | |
| Sales | $896,000 | $504,000 |
| cost of goods sold | 406,000 | 276,000 |
| Operating expenses | 210,000 | 147,000 |
| Retained earnings,1/1/18 | 1,036,000 | 252,000 |
| Inventory | 484,000 | 154,000 |
| Builidings(net) | 501,000 | 220,000 |
| Investment income | not given |
1. Assume that Polar sold inventory to Icecap at a markup equal to 25% of cost. Intra-entity transfers were $130,000 in 2017 and $165,000 in 2018. Of this inventory, $39,000 of the 2017 transfers were retained and then sold by Icecap in 2018, while $55,000 of the 2018 transfers was held until 2019.
Required:
For the consolidated financial statements for 2018, determine the balances that would appear for the following accounts: (i) Cost of Goods Sold; (ii) Inventory; and (iii) Net income attributable to the noncontrolling interest.
2.
Polar sold a building to Icecap on January 1, 2017 for $112,000, although the book value of this asset was only $70,000 on that date. The building had a five-year remaining useful life and was to be depreciated using the straight-line method with no salvage value.
Required:
For the consolidated financial statements for 2018, determine the balances that would appear for the following accounts: (i) Buildings (net); (ii) Operating expenses; and (iii) Net income attributable to the noncontrolling interest.
1Several years ago Polar Inc. acquired an 80% interest in Icecap Co. The book values of Icecap's asset and liability accounts at that time were considered to be equal to their fair values. Polar’s acquisition value corresponded to the underlying book value of Icecap so that no allocations or goodwill resulted from the transfer.
The following selected account balances were from the individual financial records of these two companies as of December 31, 2018:
| Polar | Icecap | |
| Inc. | Co. | |
| Sales | $896,000 | $504,000 |
| cost of goods sold | 406,000 | 276,000 |
| Operating expenses | 210,000 | 147,000 |
| Retained earnings,1/1/18 | 1,036,000 | 252,000 |
| Inventory | 484,000 | 154,000 |
| Builidings(net) | 501,000 | 220,000 |
| Investment income | not given |
1. Assume that Polar sold inventory to Icecap at a markup equal to 25% of cost. Intra-entity transfers were $130,000 in 2017 and $165,000 in 2018. Of this inventory, $39,000 of the 2017 transfers were retained and then sold by Icecap in 2018, while $55,000 of the 2018 transfers was held until 2019.
Required:
For the consolidated financial statements for 2018, determine the balances that would appear for the following accounts: (i) Cost of Goods Sold; (ii) Inventory; and (iii) Net income attributable to the noncontrolling interest.
2.
Polar sold a building to Icecap on January 1, 2017 for $112,000, although the book value of this asset was only $70,000 on that date. The building had a five-year remaining useful life and was to be depreciated using the straight-line method with no salvage value.
Required:
For the consolidated financial statements for 2018, determine the balances that would appear for the following accounts: (i) Buildings (net); (ii) Operating expenses; and (iii) Net income attributable to the noncontrolling interest.
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