Question

The following financial statements were prepared on December 31, Year 6:

Silver 190,000 $ BALANCE SHEETS Pearl Cash $ 390,000 Accounts receivable 290,000 Inventory 2,450,000 Plant and equipment 3,450,000 Accumulated depreciation (840,000) Investment in Silver Company, at cost 3,300,000 $ 9,040,000 Liabilities $ 737,000 Common shares 3,750,000 Retained earnings 4,553,000 $ 9,040,000 510,000 3,590,000 (400,000) $ $ 3,890,000 543,000 2,050,000 1,297,000 3,890,000 $ $ 1,450,000 INCOME STATEMENTS Sales $ 4,450,000 Dividend income 232,000 4,682,000 Cost of sales 2,590,000 Miscellaneous expenses 365,000 Administrative expenses 89,000 Income tax expense 295,000 3,339,000 Net income $ 1,343,000 1,450,000 490,000 79,000 19,000 165,000 753,000 697,000 $ STATEMENTS OF RETAINED EARNINGS $ $ Balance, January 1 Net income Dividends declared Balance, December 31 3,800,000 1,343,000 (590,000) 4,553,000 890,000 697,000 (290,000) 1,297,000 $ $

Additional Information:

Pearl purchased 80% of the outstanding voting shares of Silver for $3,300,000 on July 1, Year 2, at which time Silver’s retained earnings were $445,000 and accumulated depreciation was $69,000. The acquisition differential on this date was allocated as follows:

• 20% to undervalued inventory;
• 40% to equipment with a remaining useful life of 8 years;
• the balance to goodwill.

Pearl accounts for its investment in Silver using the cost method and values the non-controlling interest in its subsidiary based on its fair value on the acquisition date, proportionate to the price paid for its controlling interest.

During Year 3, a goodwill impairment loss of $79,000 was recognized, and an impairment test conducted as at December 31, Year 6, indicated that a further loss of $29,000 had occurred.

Amortization expense is to be grouped with cost of goods sold.

Silver owes Pearl $84,000 on December 31, Year 6.

Required:

1. Prepare consolidated financial statements on December 31, Year 6.
2. Calculate goodwill impairment loss and non-controlling interest on the consolidated income statement for the year ended December 31, Year 6, under the parent company extension theory.
3. Calculate goodwill and non-controlling interest on the consolidated balance sheet as at December 31, Year 6, under the parent company extension theory.

Answer 1

Please hit LIKE button if this helped. For any further explanation, please put your query in comment, will get back to you. Cost of 80% investment Implied value of 100% $ $ 3,300,000 4,125,000 Common shares Retained earnings $ $ 2,050,000 445,000 $ $ 2,495,000 1,630,000 $ Acquisition differential Allocated: Inventory (20%) Equipment (40%) Balance - goodwill (40%) NCI (20% x 4,125,000) 326,000 652,000 $ 978,000 652,000 825,000 Amortization Schedule Balance Amortization Balance Jul 1 Dec. 31 Dec. 31 Dec. 31 Dec. 31 Year 2 Year 2 Years 3 to 5 Year 6 Year 6 $ 326,000 $ 326,000 $ 652,000 $ 40,750 $ 244,500 $ 81,500 $ 285,250 $ 652,000 $ - $ 79,000 $ 29,000 $ 544,000 $ 1,630,000 $ 366,750 $ 323,500 $ 110,500 $ 829,250 Inventory Equipment Goodwill Calculation of consolidated net income attributable to Pearl's shareholders - Year 6 Net income Pearl Dividends from Silver (290,000*80%) $ $ $ 1,343,000 232,000 1,111,000 Net income Silver Less: Acquisition differential amortization $ $ $ 697,000 110,500 586,500 80% $ $ 469,200 1,580,200 $ 3,800,000 Calculation of consolidated retained earnings Jan. 1, Year 6 Retained earnings Pearl – Jan. 1 Retained earnings Silver - Jan.1 Acquisition retained earnings Increase since acquisition Acq. diff. amort. to end of Year 5 ($366,750+$323,500) $ $ 890,000 -445,000 445,000 $ $ -690,250 -245,250 80% $ $ -196,200 3,603,800

Calculation of non-controlling interest - Dec. 31, Year 6 Silver-Common Shares Retained earnings $ $ $ $ $ Unamortized acquisition differential 2,050,000 1,297,000 3,347,000 829,250 4,176,250 20% 835,250 $ Parta Pearl Company Consolidated Income Statement for the Year Ended December 31, Year 6 $ $ Sales (4,450,000 + 1,450,000) Cost of sales (2,590,000 + 490,000 + 81,500) Miscellaneous expense (365,000 + 79,000) Admin expense (89,000 + 19,000 + 29,000) Income tax (295,000 + 165,000) $ $ $ $ 5,900,000 3,161,500 444,000 137,000 460,000 4,202,500 1,697,500 Net income Attributable to: Pearl's shareholders Non-controlling interest [20%* (697,000-110,500)] $ $ $ 1,580,200 117,300 1,697,500 Pearl Company Consolidated Retained Earnings Statement for the Year Ended December 31, Year 6 Balance Jan. 1 Net income $ $ $ $ $ 3,603,800 1,580,200 5,184,000 -590,000 4,594,000 Dividends Balance Dec. 31 Pearl Company Consolidated Balance Sheet December 31, Year 6 $ $ Cash (390,000 + 190,000) Accounts receivable (290,000 -84,000) Inventory (2,450,000 + 510,000) Plant and equipment (3,450,000 + 3,590,000+ 652,000 - 69,000) Accumulated depreciation (840,000 + 400,000 + 366,750 -69,000) Goodwill 580,000 206,000 2,960,000 7,623,000 -1,537,750 544,000 10,375,250 $ $ $

Liabilities (737,000 + 543,000 - 84,000) Common shares Retained earnings Non-controlling interest $ $ $ $ 1,196,000 3,750,000 4,594,000 835,250 10,375,250 $ Part b Goodwill impairment loss-entity theory Less: NCI's share @20% Goodwill impairment loss-parent company extension theory 29,000 5,800 23,200 $ NCI-entity theory NCI's share of goodwill impairment loss NCI – parent company extension theory $ $ $ 117,300 5,800 123,100 $ Partc Goodwill-entity theory Less: NCI's share @20% Goodwill - parent company extension theory 544,000 108,800 435,200 $ NCI-entity theory NCI's share of goodwill impairment loss NCI - parent company extension theory $ $ 835,250 108,800 726,450