Chapter 8, Problem 1. Investment in Y Company

Transcription

1 Chapter 8, Problem 1 Before tax 40% tax After tax Asset profit - Y Company selling January 1, Year 2 - sale 45,000 18,000 27,000 Depreciation Year 2 9,000 3,600 5,400 Balance December 31, Year 2 36,000 14,400 21,600 (a) Depreciation Year 3 9,000 3,600 5,400 (b) Balance December 31, Year 3 27,000 10,800 16,200 Asset profit - X Company selling April 30, Year 3 - sale 60,000 24,000 36,000 Depreciation Year 3 (12,000 8/12) 8,000 3,200 4,800 Balance December 31, Year 3 52,000 20,800 31,200 (c) Investment in Y Company Balance January 1, Year 2 $ 86,900) Year 2 transactions: Increase in Y Company retained earnings ([125,000-70,000] 80%) 44,000) Purchase discrepancy amortization (6,900 / 6)* (1,150) Holdback of Year 2 asset profit (net) ((a) 21,600 80%) (17,280) Year 3 transactions: Increase in Y Company retained earnings ([104,000-70,000]) 80%) 27,200) Purchase discrepancy amortization (1,150) Realization of Year 2 asset profit ((b) 5,400 80%) 4,320) Holdback of Year 3 asset profit (net) (c) (31,200) Balance December 31, Year 3 $111,640) * 86,900 - (100,000 80%) = 6,900

2 Problem 2 Equipment profit Before Tax 40% tax After tax Year 2 sale Sally selling 15,000 * Depreciation Years 2 and 3 (3,000 2) 6,000 Balance December 31, Year 3 9,000 3,600 5,400 Depreciation Year 4 3,000 1,200 1,800 (a) Balance December 31, Year 4 6,000 2,400 (b) 3,600 * Assuming the sale took place at the beginning of Year 2 (a) Calculation of consolidated net income Year 4 Income of Peggy 185,000 Income of Sally 53,000 Add: Equipment profit realized (a) 1,800 Adjusted net income 54,800 (c) Peggy's ownership %.75 41,100 Consolidated net income, Year 4 226,100

3 (b) Peggy Company Consolidated Income Statement Year 4 Gross profit (580, ,000) $850,000 Miscellaneous expense (110, ,000) 195,000 Depreciation expense (162, ,000 - (a) 3,000) 256,000 Income tax expense (123, ,000 + (a) 1,200) 159,200 Total expenses 610,200 Net income - consolidated entity 239,800 Noncontrolling interest ((c) 54, ) 13,700 Consolidated net income $226,100 (c) Deferred charge - income taxes - December 31, Year 4 (b) 2,400

4 Problem 8 Calculation, allocation, and amortization of purchase discrepancy Cost of 80% investment in Spruce Ltd., Jan. 2, Year 1 2,000,000 Carrying amounts of Spruce's net assets: Common stock 500,000 Retained earnings 1,250,000 Total shareholders' equity 1,750,000 Poplar's ownership % 80% 1,400,000 Purchase discrepancy 600,000 Allocation: FV - BV Copyrights 750,000 80% 600,000 Balance 0 Balance Amortization Balance Jan. 1/1 Years 1 to 3 Year 4 Dec. 31/4 Copyrights (8 years) 600,000 (a) 225,000 (b) 75, ,000 (c) Intercompany sales and purchases 1,000,000 (d) Unrealized intercompany profits Equipment Jan. 2/2 - Spruce selling (500, ,000) 100,000 (e) Depreciation Years 2 and 3 40,000 Before tax 40% tax After tax Balance, Dec. 31, Year 3 60,000 24,000 36,000 (f) Depreciation, Year 4 20,000 8,000 12,000 (g) Balance, Dec. 31, Year 4 40,000 16,000 24,000 (h) Inventory Jan. 1, Year 4 - Spruce selling 200,000 80, ,000 (i) Inventory Dec. 31, Year 4 - Spruce selling 120,000 48,000 72,000 (j)

5 Intercompany bonds Before tax 40% tax After tax Cost of bonds Jan. 2, Year 4 242,500 Carrying value of bonds purchased Par 500,000 Issue premium (14,000 - [14,000 / 7 2]) 10, ,000 Intercompany portion 50% 255,000 Gain to entity, Jan. 1, Year 4 12,500 5,000 7,500 Interest elimination loss, Year 4* 2,500 1,000 1,500 Net gain to entity, Dec. 31, Year 4 10,000 4,000 6,000 (l) Allocation: Cost 242,500 Par value (500,000 50%) 250,000 Gain to Spruce, Jan. 1, Year 4 7,500 3,000 4,500 Interest elimination loss, Year 4* 1, Net gain to Spruce, Dec. 31, Year 4 6,000 2,400 3,600 (m) Par value 250,000 Carrying value 255,000 Gain to Poplar, Jan. 1, Year 4 5,000 2,000 3,000 Interest elimination loss, Year 4* 1, Net gain to Poplar, Dec. 31, Year 4 4,000 1,600 2,400 (n) * 5 years remaining to maturity. Deferred charge - income tax Dec. 31, Year 4 Equipment (h) 16,000 Inventory (j) 48,000 Deferred charge tax asset 64,000 Less: deferred credit - tax liability - bonds (l) 4,000 Net deferred charge income tax 60,000 (k)

6 Intercompany interest revenue and expense Interest revenue - Spruce 8% 250,000 20,000 Discount amortization (7,500 / 5) 1,500 21,500 Interest expense - Poplar 8% 500,000 40,000 Premium amortization (14,000 / 7) 2,000 38,000 Intercompany portion 50% 19,000 (o) Interest elimination loss - Year 4 (before tax) 2,500 Calculation of consolidated net income Year 4 Income of Poplar 1,100,000 Less: Amortization of purchase discrepancy (b) 75,000 Dividend from Spruce (250,000 80%) 200, , ,000 Add: bond gain (net) (n) 2,400 Adjusted net income 827,400 Income of Spruce 521,500 Less: closing inventory profit (j) 72, ,500 Add: Opening inventory profit (i) 120,000 Equipment profit realized (g) 12,000 Bond gain (net) (m) 3, ,600 Adjusted net income 585,100 (p) Poplar's ownership % 80% 468,080 Consolidated net income, Year 4 1,295,480

7 (a) (i) Poplar Ltd. Consolidated Income Statement Year 4 Sales (4,900, ,000,000-1,000,000 (d)) 5,900,000 Gain on bond retirement (e) 12,500 Total revenues 5,912,500 Cost of goods sold (2,400, ,000 - (d) 1,000,000 - (i) 200,000 + (j) 120,000) 2,170,000 Other expenses (962, ,000 (g) 20,000) 1,242,000 Copyright amortization (b) 75,000 Interest expense (38,000 - (o) 19,000) 19,000 Income tax expense (600, ,000 + (i) 80,000 - (j) 48,000 + (g) 8,000 + (l) 4,000) 994,000 Total expenses 4,500,000 Net income consolidated entity 1,412,500 Less: noncontrolling interest ((p) 585,100 20%) 117,020 Consolidated net income 1,295,480 Calculation of consolidated retained earnings Jan. 1, Year 4 Retained earnings of Poplar, Jan. 1, Year 4 10,000,000 Less: amortization of purchase discrepancy to Jan. 1/4 (a) 225,000 Adjusted retained earnings 9,775,000 Retained earnings of Spruce, Jan. 1, Year 4 2,000,000 At acquisition 1,250,000 Increase 750,000 Less: Opening inventory profit (i) 120,000 Net equipment profit (f) 36, ,000 Adjusted increase 594,000 (q) Poplar's ownership % 80% 475,200 Consolidated retained earnings, Jan. 1 Year 4 10,250,200

8 (ii) Poplar Ltd. Consolidated Statement of Retained Earnings Year 4 Retained earnings, Jan. 1, Year 4 $10,250,200 Add: net income 1,295,480 11,545,680 Less: dividends 600,000 Retained earnings, Dec. 31, Year 4 $10,945,680 Calculation of noncontrolling interest Dec. 31, Year 4 Common stock of Spruce 500,000) Retained earnings of Spruce, Jan. 1, Year 4 2,000,000) Net income, Year 4 521,500) Dividends, Year 4 (250,000) Total shareholders' equity, Dec. 31, Year 4 2,771,500) Less: Equipment profit 24,000 (h) Inventory profit 72,000 (j) 96,000) 2,675,500) Add: bond gain (net) (m) 3,600) Adjusted shareholders' equity, Spruce 2,679,100) Noncontrolling interest s share 20% ) Noncontrolling interest, Dec. 31, Year 4 535,820)

9 (iii) Poplar Ltd. Consolidated Balance Sheet Dec. 31, Year 4 Cash (1,000, ,000) 1,500,000) Accounts receivable (2,000, ,000) 2,356,000) Inventory (3,000, ,250,000 - (j) 120,000) 5,130,000) Plant and equipment (14,000, ,500,000 - (e) 100,000) 16,400,000) Accumulated depreciation (4,000, ,000,000 - (f) 60,000) (4,940,000) Copyrights (400,000 + (c) 300,000) 700,000)) Deferred charge - income taxes (k) 60,000) Total assets 21,206,000) Accounts payable (2,492, ,478,500) 4,970,500 Bonds payable (500,000 50%) 250,000 Premium on bonds payable (8,000 50%) 4,000 Noncontrolling interest 535,820 Common stock 4,500,000 Retained earnings 10,945,680 Total liabilities and shareholders' equity 21,206,000

10 (b) Investment Account, Dec. 31, Year 4 - Equity Method Balance, Dec. 31, Year 4 - cost method 2,000,000 Less: amortization of the purchase discrepancy to Jan. 1, Year 4 (a) 225,000 1,775,000 Add: Adjusted increase in Spruce's retained earnings to Jan. 1, Year 4 (q) 594,000 Poplar's ownership % 80% 475,200 2,250,200 Add: Adjusted income of Spruce, Year 4 (p) 585,100 Poplar's ownership % 80% 468,080 Bond gain (net) - Poplar (n) 2,400 2,720,680 Less: Amortization of purchase discrepancy Year 4 (b) 75,000 Dividend from Spruce (250,000 80%) 200, ,000 Balance, Dec. 31, Year 4 2,445,680 Alternative calculation: Consolidated retained earnings, Dec. 31, Year 4 10,945,680 Retained earnings - Poplar Dec. 31, Year 4 - cost method (10,000, ,100, ,000) 10,500,000 Difference 445,680 Investment in Spruce - cost method 2,000,000 Investment in Spruce - equity method, Dec. 31, Year 4 2,445,680