Question 1
On January 2, 2013, Potter Ltd. purchased 40% ontiago Ltd. for$900,000. At the acquisition date, Santiagoâs balance sheet showedtotal shareholdersâ equity of $1,500,000. Any acquisitiondifferential is to be allocated to Santiagoâs equipment. At theacquisition date, the equipment had a remaining useful life of 10years. For the past 5 years, Santiago has paid annual dividends of$50,000 and will continue to do so in the future.
The following information has been extracted from Santiagoâsincome statement:
2014 2013
Net income (loss) before extraordinaryitems $ (90,000) $ 450,000
Extraordinary gain (net oftax) __-___ 150,000
Net income(loss) $ (90,000) $ 600,000
Required:
Assume that Potter has significant influence. Prepare Potterâsjournal entries related to its investment in Santiago for 2013 and2014.
Question 2
On September 1, 2014, Sunshine Ltd. acquired all the assets(with the exception of cash) and liabilities of Moonbeam Ltd. Underthe terms of acquisition, Moonbeam shareholders received 3 Class ASunshine Ltd. shares plus $2.00 cash for every four shares ofMoonbeam. At the acquisition date, Sunshineâs Class A shares werevalued at $2.50 per share. Sunshine had agreed to cover Moonbeamâsestimated liquidation costs of $10,000. The $1,500 of cash inMoonbeamâs bank at the acquisition date will go towards payingthese costs. The statements of financial position at theacquisition date are as follows:
Sunshine Moonbeam Ltd.
Ltd. Cost FMV
Cash $ 30,000$ 1,500 $ 1,500
Accountsreceivable 52,500 28,500 26,250
Inventory 78,000 39,750 48,000
Property and equipment(net) 449,250 224,250 248,250
Kucey Ltd. bonds(investment) _67,500 _27,000 28,500
677,250 321,000
Accountspayable 117,000 114,000 114,000
Loanpayable ___-___ _60,000 60,000
117,000 174,000
Share capital issued at$1 450,000 120,000
Retainedearnings 110,250 _27,000
560,250 147,000
$677,250 $321,000
Items not reflected in Moonbeamâs statement of financialposition:
Contingent liability related to a loan guarantee was reported inthe notes to the financial statements and has a fair value of$2,000.
Moonbeam had expensed $15,000 in research and development costsin the past year. At the acquisition date, Sunshine has determinedthat the value of the research in progress is $3,000.
Sunshineâs statement of financial position does not include$5,000 in fees for valuation and accounting advice related to theacquisition of Moonbeam. Sunshine expects to pay these feesshortly.
Required:
1) Prepare the acquisition analysis and calculate thegoodwill.
2) Prepare all the journal entries in Sunshineâs books to recordthe acquisition of Moonbeam.
3) Prepare Sunshineâs statement of financial positionimmediately following the acquisition.
Question 3
On May 1, 2013, Peat Co. purchased all of Sorbet Ltd.âs issuedcommon shares for $630,000. At the acquisition date, Sorbetâsfinancial statements included the following balances:
Sharecapital $400,000
Retainedearnings 210,000
Goodwill 10,000
At the acquisition date, Sorbetâs identifiable assets andliabilities were equal to their fair values, except in the case ofinventory that had a book value of $80,000 and a fair value of$86,000, and equipment that had a book value of $360,000 and a fairvalue of $370,000. The equipment was originally purchased for$480,000. At the acquisition date, the equipment had a remaininguseful life of 5 years and was amortized using the straight-linemethod. All the inventory that Sorbet had on hand at theacquisition date was sold by October 2013. Sorbetâs goodwill hasnot shown indications of impairment. Both Peat and Sorbet haveApril 30th year-ends and did not have any intercompanysales with each other.
The financial statements for Peat and Sorbet at April 30, 2015are presented on the following pages.
Statement of Financial Position
April 30, 2015
Peat Co. SorbetLtd.
Assets:
Current assets:
Cash $ 52,000 $ 161,600
Accountsreceivable 100,000 80,000
Inventory 120,000 170,000
272,000 411,600
Non-current assets:
Equipment,net 558,000 368,000
Furniture and fixtures,net 51,000 51,600
Investment in SorbetLtd. 630,000 -
Goodwill ___-___ 10,000
1,239,000 429,600
Totalassets $1,511,000 $841,200
Liabilities and shareholdersâ equity:
Current liabilities:
Accountspayable $ 69,000 $ 19,600
Non-current liabilities:
Loanpayable 22,000 32,000
Totalliabilities 91,000 51,600
Shareholdersâ equity:
Sharecapital 1,000,000 400,000
Retainedearnings 420,000 389,600
1,420,000 789,600
Total liabilities and shareholdersâequity $1,511,000 $841,200
Condensed Statement of Income
For the year ended April 30, 2015
Peat Co. SorbetLtd.
Sales $250,000 $180,000
Expenses 170,000 130,000
Netincome $ 80,000 $ 50,000
Statement of Changes in Equity
For the year ended April 30, 2015
Peat Co. SorbetLtd.
Sharecapital $1,000,000 $400,000
Retained earnings, May 1,2014 340,000 339.600
Netincome 80,000 50,000
Retained earnings, April 30,2015 420,000 389,600
Total shareholdersâequity $1,420,000 $789,600
Required:
Prepare Peatâs consolidated financial statements for April 30,2015. Ignore income taxes.
Question 4
On June 30, 2014, Pewter Ltd. gave 28,000 shares to Sterling Co.in exchange for 70% of Sterlingâs outstanding shares. At the timeof the exchange, Pewterâs shares had a fair value of $22.50 pershare. The post-acquisition statements of financial position andSterlingâs fair values are shown below.
Statement of Financial Position
As of June 30, 2014
Sterling Co.______
Pewter Ltd. Book value Fair Value
Assets:
Current assets:
Cash $ 750,000 $ 37,500 $ 37,500
Accountsreceivable 1,500,000 112,500 112,500
Inventory 150,000 37,500 37,500
2,400,000 187,500
Non-current assets:
Land 750,000 225,000 300,000
Equipment 2,250,000 375,000 412,500
Accumulatedamortization (900,000) (112,500)
Investment inSterling 630,000 __ -___
2,730,000 487,500
Totalassets $5,130,000 $ 675,000
Liabilities and shareholdersâ equity:
Current liabilities:
Accountspayable $ 750,000 $ 75,000 75,000
Loanpayable 300,000 _____
1,050,000 75,000
Shareholdersâ equity:
Commonshares 2,580,000 150,000
Retainedearnings 1,500,000 450,000
4,080,000 600,000
Total liabilities and shareholdersâequity $5,130,000 $ 675,000
Required:
a) Calculate Pewterâs consolidated goodwill.
b) Prepare Pewterâs consolidated statement of financial positionat
June 30, 2014 using the entity theory method of consolidation.
