Assignment Problems For Chapter 6 Page 18

Assignment Problems For Chapter 6

(The solutions for these problems are only available in the solutions manual that has been provided to your instructor.)

Assignment Problem Six - 1 (Open Trial Balance - Profits - NCI At Fair Value) On December 31, 2009, the Pumpkin Company purchased 75 percent of the outstanding voting shares of the Squash Company for $4,200,000 in cash. On that date, the Squash Company had No Par Common Stock of $3,900,000 and Retained Earnings of $600,000. All of the Squash Company s identifiable assets and liabilities had carrying values that were equal to their fair values except for:
1. Inventories with fair values that were $60,000 more than their carrying values. 2. Land which had a fair value that was $300,000 greater than its carrying value. 3. Equipment which had a fair value of $270,000 more that its carrying value. Its remaining useful life is 15 years with no expected salvage value. 4. Long-Term Liabilities which had fair values that were $90,000 more than their carrying values and mature on December 31, 2015. Pumpkins management elects to record the acquisition date non-controlling interest at its fair value, measured on the basis of the price paid for the controlling interest. The Balance Sheets of the Pumpkin Company and the Squash Company as at December 31, 2013 were as follows: Pumpkin and Squash Companies Balance Sheets As At December 31, 2013 Pumpkin Cash and Current Receivables Inventories Current Assets Long-Term Receivables Plant and Equipment (Net) Investment in Squash (Cost) Land Total Assets Current Liabilities Long-Term Liabilities Total Liabilities Shareholders Equity No Par Common Stock Retained Earnings Total Equities $ 1,620,000 1,800,000 $ 3,420,000 840,000 4,500,000 4,200,000 2,400,000 $15,360,000 $ 480,000 660,000 Squash $ 930,000 660,000 $1,590,000 300,000 2,700,000 N/A 1,200,000 $5,790,000 $ 240,000 390,000 $ 630,000 3,900,000 1,260,000 $5,790,000

$ 1,140,000 10,200,000 4,020,000 $15,360,000

The Income Statements of the Pumpkin and Squash Companies for the year ending December 31, 2013 were as follows:

Canadian Advanced Accounting (2nd IC Edition) - Assignment Problems

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Pumpkin and Squash Companies Income Statements For The Year Ending December 31, 2013 Pumpkin Sales Interest Revenue Other Revenues Total Revenues Cost of Goods Sold Interest Expense Other Expenses Total Expenses Net Income Other Information: 1. In each of the years since Pumpkin acquired control over Squash, the goodwill arising on this business combination transaction has been tested for impairment. In 2011, a Goodwill Impairment Loss of $84,000 was recognized. No impairment was found in any of the other years since acquisition. 2. Both Companies use the straight line method to calculate amortization charges. 3. Pumpkin uses the cost method to carry its Investment in Squash. 4. During 2013, dividends of $360,000 were declared and paid by Pumpkin and dividends of $120,000 were declared and paid by Squash. 5. The Pumpkin Company manufactures machines with a five year life. Its Sales total in the Income Statement includes only sales of these machines. Intercompany sales of these machines are priced to provide Pumpkin with a 20 percent gross profit on sales prices in all the years under consideration. On December 31, 2011, Pumpkin sold machines it had manufactured to Squash for $150,000. Squash uses the machines in its production process. On January 1, 2013, Pumpkin sold an additional $300,000 of these machines to the Squash Company. There were no other intercompany sales of these machines in any of the years under consideration. 6. The Squash Company manufactures paper products used in offices. During 2012, Squash sold to Pumpkin $18,000 worth of office supplies of which all but $3,000 were used by Pumpkin in 2012. During 2013, Pumpkin purchased $15,000 worth of merchandise from Squash. During 2013, the Pumpkin Company used $9,000 worth of these paper products purchased from Squash. Squashs intercompany sales are priced to provide it with a 50 percent gross margin on its sales price. 7. On January 1, 2011, Squash sold a piece of equipment to Pumpkin for 20 percent more than its carrying value of $300,000. At this time, the equipment has an estimated remaining useful life of eight years, with no anticipated salvage value. 8. During 2012, Squash sold land that had a carrying value of $240,000 to Pumpkin for a profit of $30,000. One-half of the proceeds was paid at that date and the remainder is due on July 1, 2014. The Land that had the fair value increase of $300,000 on December 31, 2009 is still on the books of Squash. 9. On December 31, 2013, Squash had current receivables of $6,000 from Pumpkin and Pumpkin is owed $18,000 by Squash. Intercompany interest which was paid during 2013 on outstanding intercompany payables totalled $1,000 for Squash and $1,400 for Pumpkin. $5,610,000 84,000 90,000 $5,784,000 $3,900,000 66,000 690,000 $4,656,000 $1,128,000 Squash $1,770,000 30,000 Nil $1,800,000 $1,260,000 45,000 240,000 $1,545,000 $ 255,000

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Required: A. Prepare the consolidated Income Statement for the year ending December 31, 2013 of the Pumpkin Company and its subsidiary, the Squash Company. B. Prepare the consolidated Statement of Retained Earnings for the year ending December 31, 2013, of the Pumpkin Company and its subsidiary, the Squash Company. C. Prepare the consolidated Balance Sheet as at December 31, 2013 of the Pumpkin Company and its subsidiary, the Squash Company.

Assignment Problem Six - 2 (Income Statement And Balance Sheet Items - NC On Assets) On January 1, 2009, the Paul Company acquired 75 percent of the outstanding voting shares of the Saul Company for $6,000,000 in cash. On this date the Saul Company had No Par Common Stock of $6,200,000 and Retained Earnings of $2,800,000.
At this acquisition date, the Saul Company had Plant And Equipment that had a fair value that was $600,000 less than its carrying value, Long-Term Liabilities that had a fair value that was $200,000 more than their carrying values and Inventories with a fair value that was less than their carrying values in the amount of $800,000. The remaining useful life of the Plant And Equipment was 12 years with no anticipated salvage value. The Long-Term Liabilities were issued at par of $4,000,000 and mature on January 1, 2019. All of the other identifiable assets and liabilities of the Saul Company had fair values that were equal to their carrying values on the date of acquisition. The management of Paul elects to measure the acquisition date non-controlling interest in Saul on the basis of the fair value of the Company s identifiable net assets. On January 1, 2012, the Saul Company sells a broadcast licence to the Paul Company for $900,000. On this date the carrying value of this broadcast licence on the books of the Saul Company was $1,000,000 and the remaining useful life was five years. Amortization is calculated on a straight line basis by both companies. Between January 1, 2009 and January 1, 2014, the Saul Company had Net Income of $2,200,000 and paid dividends of $800,000. On January 1, 2014, the Retained Earnings of the Paul Company were $30,000,000. During 2014, the Paul Company declared and paid dividends of $200,000 and the Saul Company declared and paid dividends of $100,000. The Paul Company carries its Investment in Saul by the cost method. The condensed Income Statements of the two Companies for the year ending December 31, 2014 are as follows: Paul and Saul Companies Income Statements For The Year Ending December 31, 2014 Paul Total Revenues Cost Of Goods Sold Other Expenses Total Expenses Net Income $5,000,000 $3,000,000 1,500,000 $4,500,000 $ 500,000 Saul $2,000,000 $1,200,000 600,000 $1,800,000 $ 200,000

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During 2014, 40 percent of the Saul Company s Revenues resulted from sales to the Paul Company. Half of this merchandise remains in the ending inventories of the Paul Company and has not yet been paid for. The December 31, 2014 inventory balances for the Paul and Saul Companies are $950,000 and $380,000 respectively. On January 1, 2014, the inventories of the Paul Company contained purchases from the Saul Company of $500,000. All intercompany merchandise transactions are priced to provide Saul with a gross margin on sales prices of 40 percent. The Saul Company has not issued any additional Common Stock or Long-Term Liabilities since the date of its acquisition by the Paul Company. On December 31, 2014, the Paul Company had $15,000,000 in Long-Term Liabilities. In each of the years since Paul purchased the shares of Saul, the goodwill arising from this share purchase has been tested for impairment. No impairment was found in any of the years since acquisition. Required: A. Prepare the consolidated Income Statement for the year ending December 31, 2014 for the Paul Company and its subsidiary, the Saul Company. B. Calculate the amounts, showing all computations, that would be included in the consolidated Balance Sheet as at December 31, 2014 of the Paul Company and its subsidiary, the Saul Company for the following accounts: 1. 2. 3. 4. 5. 6. Retained Earnings Non-Controlling Interest Inventories Broadcast Licence Long-Term Liabilities Goodwill

Assignment Problem Six - 3 (Consolidated Cash Flow Statement - Profits) The Norwood Company purchased 75 percent of the outstanding voting shares of the Sollip Company on January 1, 2009 for $2,000,000 in cash. On the acquisition date, Sollip had Retained Earnings of $1,400,000 and Common Stock of $600,000.
At this time, the Sollip Company s identifiable assets and liabilities had fair values that were equal to their carrying values except for:

Plant And Equipment, which had a fair value that was $40,000 more than carrying value. This Plant And Equipment had a remaining life of 10 years with no anticipated salvage value. Long-Term Liabilities with a fair value that was $80,000 less than carrying value. These Long-Term Liabilities mature on January 1, 2019.

The management of Norwood elects to record the acquisition date non-controlling interest in Sollip at its fair value. This fair value will be measured on the basis of the price paid for the controlling interest. The Norwood Company carries its Investment In Sollip by the cost method. Both Companies use the straight line method to calculate amortization. The comparative Balance Sheets and the condensed Statement of Income And Change In Retained Earnings for the year ending December 31, 2012 of the Norwood Company and its subsidiary, the Sollip Company are as follows:

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Balance Sheets As At December 31 Norwood 2012 2011 Cash Accounts Receivable Inventories Investment In Sollip (At Cost) Plant And Equipment Accumulated Amortization Land Total Assets Current Liabilities Long-Term Liabilities Common Stock - No Par Retained Earnings Total Equities Sollip 2012 2011

$1,009,988 $ 360,000 $1,200,000 $ 600,000 1,394,000 64,000 780,000 200,000 310,000 170,000 480,000 320,000 2,000,000 2,000,000 N/A N/A 6,240,000 6,000,000 4,000,000 4,000,000 ( 3,045,667) ( 2,800,000) ( 1,988,000) ( 1,600,000) 120,000 120,000 60,000 Nil $8,028,321 $5,914,000 $2,468,321 900,000 2,020,000 2,640,000 $8,028,321 $ 714,000 800,000 2,000,000 2,400,000 $4,532,000 $1,452,000 560,000 600,000 1,920,000 $3,520,000 $ 760,000 360,000 600,000 1,800,000

$5,914,000

$4,532,000 $3,520,000

Statements Of Income And Retained Earnings Year Ending December 31, 2012 Norwood Total Revenues Cost Of Goods Sold Amortization Expense Other Expenses And Losses Total Expenses And Losses Net Income Retained Earnings, January 1 Balance Available Dividends Balance, December 31 Other Information: 1. On January 1, 2010, the Sollip Company sold furniture to the Norwood Company for $31,000. The furniture had a net book value of $85,000 and an estimated useful life on this date of four years with no anticipated salvage value. 2. On December 31, 2011, the Norwood Company had in its Inventories $35,000 of merchandise that it had purchased from Sollip during 2011. During 2012, Norwood purchased $200,000 of merchandise from Sollip, of which $75,000 remain in the December 31, 2012 Inventories of Norwood. The Norwood Company sold $120,000 of merchandise to Sollip during 2012, which was resold during the year for $165,000. Intercompany inventory sales are priced to provide the selling company with a 30 percent gross profit on sales price. 3. On December 31, 2012, due to the intercompany inventory sales, the Norwood Company owed the Sollip Company $60,000 and the Sollip Company owed the Norwood Company $80,000. There were no intercompany accounts payable balances on December 31, 2011. Canadian Advanced Accounting (2nd IC Edition) - Assignment Problems ( $2,760,000 $1,200,000 410,667 849,333 $2,460,000 $ 300,000 2,400,000 ( $ Sollip $2,000,000 790,000 548,000 342,000 320,000 1,800,000

$1,680,000 $

$2,700,000 60,000) $2,640,000

$2,120,000 200,000) $1,920,000

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4. On January 1, 2012, to raise cash, the Norwood Company took out a $100,000 second mortgage on its assets. In addition, it sold office equipment that had cost $195,000 and had accumulated amortization of $165,000 for $20,000. 5. On December 31, 2012, the Sollip Company sold a machine to the Norwood Company for $55,000. The machine had been purchased on January 1, 2009 for $200,000 and had an expected life at that date of 5 years with no anticipated salvage value. The Sollip Company had taken amortization for 2012 on the machine before the sale. The only Plant And Equipment acquisition of the Sollip Company was a $200,000 machine to replace the one sold to Norwood. 6. On June 30, 2012, the Norwood Company also purchased other Equipment for a combination of $360,000 in cash and 4,000 No Par Common Shares. The stock was trading at $5 per share on this date. 7. On April 1, 2012, the Sollip Company issued 20 year, 14 percent bonds for $200,000 and used part of the proceeds to purchase a parcel of land. 8. In the year of acquisition of Sollip, a Goodwill Impairment Loss of $200,000 was recognized due to an unfavourable ruling in a court case. No impairment was found in any of the other years since acquisition. Required: (Note that in Parts A, B and C, financial statements are not required.)

A. Compute Consolidated Net Income Of The Enterprise for the year ending December 31, 2012 for the Norwood Company and its subsidiary, the Sollip Company. B. Calculate consolidated Retained Earnings as at December 31, 2012 for the Norwood Company and its subsidiary, the Sollip Company. C. Compute the Non-Controlling Interest that would be disclosed on the consolidated Balance Sheet of the Norwood Company and its subsidiary, the Sollip Company as at December 31, 2012. D. Prepare the consolidated Cash Flow Statement for the year ending December 31, 2012 for the Norwood Company and its subsidiary, the Sollip Company.

Assignment Problem Six - 4 (Completed Consolidated Statements With Questions) The single entity and consolidated Balance Sheets and Income Statements for the Pomp Company and its subsidiary, the Sircumstance Company, for the year ending December 31, 2013, are as follows:

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Balance Sheets As At December 31, 2013 Pomp Cash Accounts Receivable Inventories Current Assets Investment In Sircumstance Land Plant And Equipment (Net) Goodwill Total Assets Current Liabilities Dividends Payable Bonds Payable Total Liabilities Shareholders Equity Non-Controlling Interest Common Stock (No Par) Retained Earnings Total Equities $ 20,000 400,000 380,000 Sircumstance $ 15,000 250,000 335,000 Consolidated $ 35,000 520,000 635,000

$ 800,000 1,500,000 800,000 3,000,000 Nil $6,100,000 $ 200,000 50,000 2,000,000 $2,250,000 Nil 3,000,000 850,000 $6,100,000

$ 600,000 N/A 1,200,000 2,300,000 Nil $4,100,000 $ 100,000 25,000 1,475,000 $1,600,000 Nil 1,000,000 1,500,000 $4,100,000

$1,190,000 Nil 2,125,000 5,500,000 190,000 $9,005,000 $ 190,000 55,000 3,475,000 $3,720,000 549,000 3,000,000 1,736,000 $9,005,000

Income Statements For The Year Ending December 31, 2013 Pomp Sales Cost Of Goods Sold Other Expenses Goodwill Impairment Loss Investment Income Net Income (Single Entities) Consolidated Net Income Of The Enterprise Non-Controlling Interest (Loss) Controlling Interest In The Net Income Of The Enterprise Dividends Declared Increase In Retained Earnings Other Information: 1. Pomp Company acquired 80 percent of the Common Stock of the Sircumstance Company on January 1, 2009. At that time, all of the identifiable assets and liabilities of the Sircumstance Company had fair values that were equal to their carrying values except for Land which had a fair value that was $125,000 in excess of its carrying value. The Land is still on the books of the Sircumstance Company on December 31, 2013. Pomp elects to record the at acquisition non-controlling interest in Sircumstance on the basis of its share of the fair value of the identifiable net assets of the subsidiary. $3,200,000 ( 2,000,000) ( 800,000) Nil 40,000 $ 440,000 Sircumstance $2,500,000 ( 1,000,000) ( 1,400,000) Nil Nil $ 100,000 Consolidated $5,400,000 ( 2,720,000) ( 2,300,000) ( 10,000) Nil N/A $ 370,000 4,000 $ 374,000 200,000) $ 174,000

200,000) $ 240,000

( $

50,000) 50,000

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2. In each of the years since Pomp acquired control over Sircumstance, the goodwill arising on this business combination transaction has been tested for impairment. No impairment was found in any year prior to 2013. 3. Both Companies calculate amortization using the straight line method. 4. The Sircumstance Company regularly sells merchandise to the Pomp Company and, after further processing, the merchandise is resold by the Pomp Company. 5. On January 1, 2011, the Sircumstance Company sold equipment to the Pomp Company at a loss. At the time, the remaining useful life of this equipment was five years. 6. Since the Pomp Company acquired its investment in the Sircumstance Company, there has been no change in the number of Sircumstance Company common shares outstanding. Required: On the basis of the information you can develop from an analysis of the preceding individual and consolidated financial statements, provide answers to the following questions. A. Does the Pomp Company carry its investment in the Common Stock of the Sircumstance Company by the cost method or the equity method? Explain the basis for your conclusion. B. Assume that $1,500,000 was the cost of the Pomp Companys investment in the Common Stock of the Sircumstance Company. What was the balance in the Retained Earnings account of the Sircumstance Company on January 1, 2009? C. What is the amount of intercompany inventory sales that the Sircumstance Company made to the Pomp Company during 2013? D. What is the explanation for the difference between the consolidated Cost Of Goods Sold and the combined Cost Of Goods Sold of the two affiliated Companies? Your answer should include the computation of any intercompany profit in the opening inventories of the Pomp Company and the computation of any intercompany profit in the closing inventories of the Pomp Company. The amount of intercompany sales previously calculated should also be used in this computation. E. On January 1, 2011, what was the amount of unrealized loss on the intercompany sale of Plant And Equipment by Sircumstance Company to the Pomp Company? F. Prepare a schedule of intercompany debts and, if possible, indicate which Company is the creditor and which is the debtor.

G. Verify the Non-Controlling Interest in the Consolidated Net Income Of The Enterprise for the year ending December 31, 2013. H. Using the information given and your answers calculated in the preceding parts of this question, verify the controlling interest in the Consolidated Net Income Of The Enterprise for the year ending December 31, 2013. I. J. Verify the Non-Controlling Interest in the consolidated Balance Sheet as at December 31, 2013. Using the information given and your answers calculated in the preceding parts of this question, verify the consolidated Retained Earnings figure as at December 31, 2013.

Canadian Advanced Accounting (2nd IC Edition) - Assignment Problems