Page 11 (The solutions for these problems are only available in the solutions manual that has been provided to your instructor.) Assignment Problem Five - 1 (Open Trial Balance - No Profits - NCI On Assets - Equity Method Calculations) On January 1, 2009, the Perry Company purchased 72 percent of the outstanding voting shares of the Styan Company for $3,975,000 in cash. On that date, the Styan Company had No Par Common Stock of $1,680,000 and Retained Earnings of $3,570,000. All of the Styan Company s identifiable assets and liabilities had carrying values that were equal to their fair values except for: 1. Inventories which had fair values of $1,806,000 and carrying values of $2,037,000. 2. Buildings which had fair values that were $175,000 more than their carrying values and a remaining useful life of 20 years. 3. Land which had a fair value of $1,596,000 and a carrying value of $1,400,000. 4. A Patent with a nil carrying value and a fair value of $154,000. The patent has a remaining life of two years. 5. Long-Term Liabilities which had fair values that were $210,000 more than their carrying values and mature on December 31, 2018. Perry records the at acquisition non-controlling interest in Styan based on this interest s share of the fair value of the identifiable net assets of Styan. The Balance Sheets of the Perry Company and the Styan Company as at December 31, 2011 were as follows: Perry and Styan Companies Balance Sheets As At December 31, 2011 Perry Styan Cash $ 175,000 $ 17,500 Current Receivables 910,000 140,000 Inventories 1,709,750 1,050,000 Current Assets $ 2,794,750 $1,207,500 Equipment (Net) 3,584,000 2,248,750 Buildings (Net) 3,727,500 2,187,500 Investment in Styan (Cost) 3,975,000 N/A Land 1,406,250 1,400,000 Total Assets $15,487,500 $7,043,750 Dividends Payable Nil $ 70,000 Current Liabilities $ 840,000 350,000 Long-Term Liabilities 3,587,500 3,064,000 Total Liabilities $4,427,500 $3,484,000 Shareholders Equity: Preferred Stock 280,000 Nil No Par Common Stock 9,100,000 1,680,000 Retained Earnings 1,680,000 1,879,750 Total Equities $15,487,500 $7,043,750
Page 12 The Income Statements of the Perry and Styan Companies for the year ending December 31, 2011 were as follows: Perry and Styan Companies Income Statements For The Year Ending December 31, 2011 Perry Styan Sales $3,800,000 $1,120,000 Other Revenues 62,400 200,000 Total Revenues $3,862,400 $1,320,000 Cost of Goods Sold $1,412,000 $ 623,000 Amortization Expense 525,000 175,000 Other Expenses 1,567,000 235,000 Total Expenses $3,504,000 $1,033,000 Income Before Results Of Discontinued Operations $ 358,400 $ 287,000 Results Of Discontinued Operations Nil ( 2,052,500) Net Income (Loss) $ 358,400 ($1,765,500) Other Information: 1. In both of the years since Perry acquired control over Styan, the goodwill arising on this business combination transaction has been tested for impairment. No impairment was found in either 2009 or 2010. However, due to the large loss for 2011, the goodwill related to the purchase of Styan shares has a nil fair value on December 31, 2011. 2. Both Companies use the straight line method to calculate amortization charges. 3. In its single entity records, Perry uses the cost method to carry its Investment In Styan. 4. The Sales account in both Companies Income Statements include only sales of merchandise. All other income is accounted for in Other Revenues. 5. The Styan Company has sold no Land since January 1, 2009. 6. During 2011, dividends of $175,000 were declared and paid by Perry and dividends of $70,000 were declared by Styan. 7. During 2011, Perry sold to Styan merchandise worth $217,000 which was resold by Styan for a gross profit of $162,000 outside of the consolidated entity in 2011. Styan owes Perry $84,000 on December 31, 2011 due to these purchases. 8. During October, 2011, Styan charged the Perry Company $70,000 for the services of a team of computer programmers. The wages paid to the programmers for this work totalled $58,500. Perry still has a balance of $3,500 outstanding for this charge on December 31, 2011. Required: A. Prepare the consolidated Income Statement for the year ending December 31, 2011 of the Perry Company and its subsidiary, the Styan Company. B. Prepare the consolidated Statement Of Retained Earnings for the year ending December 31, 2011 of the Perry Company and its subsidiary, the Styan Company.
Page 13 C. Prepare the consolidated Balance Sheet as at December 31, 2011 of the Perry Company and its subsidiary, the Styan Company. D. Assume that the Perry Company, despite its majority ownership, does not have control over Styan and carries its Investment In Styan using the equity method. Calculate and disclose the amount(s) of investment income that would be shown in the Perry Company s Income Statement under this assumption. (An Income Statement is not required.) Assignment Problem Five - 2 (Open Trial Balance - No Profits - NCI At Fair Value - No Balance Sheet) On April 1, 2009, the Perle Company acquired 70 percent of the outstanding voting shares of the Thane Company for $1,785,000 in cash. On this date the book value of the Thane Company s Shareholders Equity was $2,600,000 and all of the Thane Company s identifiable assets and liabilities had fair values that were equal to their carrying values except for the following: Carrying Value Fair Value Marketable Securities $ 28,000 $ 35,000 Fleet of Trucks 324,000 365,000 Division F - Building and Equipment (Net) 631,000 453,000 Land 96,000 118,000 Long-Term Liabilities - Par $2,000,000 1,983,000 2,010,000 The management of Perle intends to measure the non-controlling interest in Thane at its fair value, determined on the basis of the price paid for the controlling Interest. The Marketable Securities were sold on March 17, 2010 for $33,000. The fleet of trucks have an estimated remaining useful life of four years on April 1, 2009 and no anticipated salvage value. The Division F Building and Equipment was purchased on April 1, 1997 and had an estimated useful life of 20 years on that date. When purchased they had an anticipated salvage value of $80,000 and there is no change in the estimates of salvage value or total useful life on April 1, 2009. The parcel of Land is being held in anticipation of expansion in 2015. The Long-Term Liabilities are scheduled to mature on April 1, 2015. Both Companies use the straight line method for amortization calculations. The Perle Company carries its investment in Thane Company using the cost method. This is applied on a pro rata basis to assets that are owned for less than a full year. For the year ending December 31, 2011, the Income Statements for the Perle Company and the Thane Company are as follows: Perle and Thane Companies Income Statements For The Year Ending December 31, 2011 Perle Thane Sales Revenue $4,887,000 $1,450,000 Investment Income 29,500 12,000 Total Revenues $4,916,500 $1,462,000 Cost Of Goods Sold $2,117,000 $ 829,000 Amortization Expense 935,000 135,000 Other Expenses and Losses 1,284,000 246,000 Total Expenses $4,336,000 $1,210,000 Net Income $ 580,500 $ 252,000
Page 14 Other Information: 1. On January 1, 2011, the Retained Earnings balance of the Perle Company was $8,463,000. During 2011, the Perle Company paid dividends totalling $115,000. 2. Between April 1, 2009 and December 31, 2010, Thane earned Net Income of $192,000 and declared dividends totalling $46,000. 3. During the period April 1, 2009 until December 31, 2011, neither the Perle Company nor the Thane Company issue or retire shares of common stock. 4. In each of the years since Perle acquired control over Thane, the goodwill arising on this business combination transaction has been tested for impairment. No impairment was found in any of the years since acquisition. 5. The Perle Company s investment income for 2011 consists of $5,000 in interest revenue and its income from the Thane Company. 6. During 2011, the Thane Company used the services of several of the Perle Company s accountants and agreed to pay a fee of $5,600 for these services. On December 31, 2011, this fee remains unpaid. This amount is included in the Sales Revenues of the Perle Company and in the Other Expenses of the Thane Company. The salaries paid to the accountants by the Perle Company for the work done on the Thane Company amount to $4,200 and are included in the Other Expenses of the Perle Company. 7. On January 1, 2011, the Perle Company rented a building from the Thane Company for a monthly rent of $2,000. On December 31, 2011, the Perle Company owed three months rent. The rent is included in the Sales Revenues of the Thane Company and in the Other Expenses of the Perle Company. Required: A. For the year ending December 31, 2011, prepare the consolidated Income Statement and the consolidated Statement Of Retained Earnings of the Perle Company and its subsidiary, the Thane Company. Include a verification of the December 31, 2011 consolidated Retained Earnings balance. B. Calculate the Non-Controlling Interest that would be shown in the December 31, 2011 consolidated Balance Sheet of the Perle Company and its subsidiary, the Thane Company. C. Assume that on December 31, 2011, the Thane Company sold the Division F assets to someone outside the consolidated entity for $380,000, creating a loss of $61,594 on Thane Company s books. Assume that this loss is included in Thane s Other Expenses And Losses. The sale consisted of the Building and Equipment which had the fair value change on April 1, 2009. Provide the journal entries to record the effect of the loss on the consolidated Income Statement of the Perle Company and its subsidiary, the Thane Company for the year ending December 31, 2011.
Page 15 Assignment Problem Five - 3 (Consolidated Cash Flow Statement - No Profits) The ledger account balances for the Pump Company and the Slump Company on December 31, 2009 and 2010 are as follows: December 31, 2010 December 31, 2009 Pump Slump Pump Slump Cash $ 42,200 $ 69,400 $ 113,400 $ 19,600 Accounts Receivable 99,400 128,400 108,400 63,000 Other Current Receivables 82,600 44,800 64,600 49,000 Inventories 93,200 128,800 99,600 96,800 Investment in Slump (Cost) 356,800 N/A 356,800 N/A Other Investments (Cost) 21,600 66,800 185,600 66,800 Land 36,400 30,000 57,400 30,000 Buildings 271,600 174,000 213,400 130,000 Equipment 122,000 90,000 96,000 90,000 Dividends Declared 48,000 28,000 Nil Nil Total Debits $1,173,800 $760,200 $1,295,200 $545,200 Bad Debt Allowance $ 9,000 $ 7,800 $ 8,200 $ 7,400 Accumulated Amortization 139,000 101,200 82,600 62,400 Accounts Payable 45,800 91,800 62,400 73,600 Notes Payable 82,000 50,000 176,800 Nil Dividends Payable Nil 28,000 Nil Nil Other Accruals 11,800 41,600 25,400 25,200 Taxes Payable 39,200 38,800 73,000 24,600 Bonds Payable Nil Nil 60,000 Nil Common Stock - No Par 584,000 226,400 584,000 226,400 Opening Retained Earnings 222,800 125,600 124,600 77,400 Net Income 40,200 49,000 98,200 48,200 Total Credits $1,173,800 $760,200 $1,295,200 $545,200 Other Information: 1. On January 2, 2009, the Pump Company acquired from the shareholders of the Slump Company, 90 percent of the Slump Company s outstanding voting shares for the following consideration: 500 Shares of Pump Common Stock - No Par $200,000 Note Payable To Slump Shareholders - Due June 30, 2012 156,800 Total Consideration $356,800 On that date, the Slump Company s identifiable assets and liabilities had carrying values that were equal to their fair values. The excess of the purchase price over Pump s share of these values has been allocated to Goodwill. There was no impairment of this Goodwill in either 2009 or 2010. Pump elects to record the non-controlling interest in Sump on the basis of the fair value of that Company s identifiable net assets. The Note Payable was unexpectedly paid in advance on June 30, 2010. All other Notes Payable present on the books of Pump and Sump are classified as current.
Page 16 2. On January 1, 2010, Pump sold Other Investments for proceeds of $202,600. These investments had been carried at a cost of $170,800. Pump also sold Land which had cost $21,000, for proceeds of $37,600. 3. On June 30, 2010, Pump demolished an unneeded Building which had cost $37,800 and had a net book value of $10,800. 4. During 2010, Pump declared and paid cash dividends of $48,000. On December 1, 2010, Slump declared a $28,000 cash dividend. This dividend was payable on January 15, 2011, to holders of record on December 20, 2010. Pump has recorded the dividends in Other Current Receivables. Slump declared no other dividends during 2010. 5. The Pump Company s Bonds Payable were retired in 2010. Cash of $65,000 was paid which included $60,000 in par value, $1,200 in accrued interest and a $3,800 penalty for early retirement. 6. On December 31, 2010, Pump Company s Other Current Receivables include a $50,000 non-interest bearing Note Payable by Slump. Slump Company s December 31, 2010 Accounts Receivable includes $37,000 due from Pump for merchandise purchases. Slump had sold the merchandise to Pump for an amount equal to the cost of the merchandise to Slump. There are no intercompany receivables or payables on December 31, 2009. Required: Prepare a consolidated Cash Flow Statement for the Pump Company and its subsidiary, the Slump Company for the year ending December 31, 2010. Assignment Problem Five - 4 (Step Acquisition - No Profits) The carrying value and fair value of the identifiable net assets of the Slice Company are as follows: Carrying Value Fair Value December 31, 2009 $4,265,000 $4,365,000 December 31, 2010 $4,865,000 $5,065,000 On December 31, 2009, the Piece Company acquires 20 percent of the 100,000 outstanding voting shares of the Slice Company for cash of $904,000 ($45.20 per share). The remaining useful life of the Slice Company assets on which the fair value changes exist is 10 years and no salvage value is anticipated. As this investment gives Piece significant influence over Slice, it will be accounted for using the equity method. During 2010, Slice Company has Net Income of $120,000 and declares dividends of $80,000. On December 31, 2010, the Piece Company acquires an additional 50 percent of the 100,000 outstanding voting shares of the Slice Company for cash of $2,873,000 ($57.46 per share). The remaining life of the Slice Company assets on which the fair value changes exist is is now 9 years. As Piece now has control of the operations of Slice, consolidated financial statements will be prepared. Piece intends to record the non-controlling interest in Slice on the basis of the fair value of Slice s identifiable net assets. Both companies have a December 31 year end and use the straight-line method for amortizing assets.
Page 17 Required: A. Provide the 2010 journal entries required to account for Piece s investment in Slice using the equity method. In addition, provide the journal entry to record any gain or loss on this investment that will result from Piece acquiring control of Slice on December 31, 2010. B. Determine the goodwill that will be recognized in the December 31, 2010 consolidated Balance Sheet that will be prepared for Piece and its subsidiary Slice.