Question 1
For each of the following scenarios, prepare dated journal entries on the acquiring company's books for the investment from acquisition to disposal. Ignore income taxes.
a) On March 1, 20X7, Rondeau Ltd., a private enterprise, acquired 1,000 shares of Hoi Co. for $30,000. This investment represents a 15% interest in Hoi. Rondeau uses the cost method to record the investment. On November 30, 20X7, Hoi paid a $25,000 dividend to its shareholders. At February 28, 20X8, Hoi's shares were valued at $40/share and Hoi reported net income of $150,000 for the year. On April 15, 20X8, Rondeau sold the shares for $53,000. Both Rondeau and Hoi have February 28th year-ends.
b) On March 1, 20X7, Casey Co. acquired 1,000 shares of Hoi Co. for $30,000. This investment represents a 15% interest in Hoi. Casey has classified this investment as an FVTPL. On November 30, 20X7, Hoi paid a $25,000 dividend to its shareholders. At February 28, 20X8, Hoi's shares were valued at $40/share and Hoi reported net income of $150,000 for the year. On April 15, 20X8, Casey sold the shares for $53,000. Both Casey and Hoi have February 28th year-ends.
c) On March 1, 20X7, JBJ Co. acquired 1,000 shares of Hoi Co. for $30,000. This investment represents a 15% interest in Hoi. JBJ has classified this investment as an FVTOCI. On November 30, 20X7, Hoi paid a $25,000 dividend to itsshareholders. At February 28, 20X8, Hoi's shares were valued at $40/share and Hoi reported net income of $150,000 for the year. On April 15, 20X8, JBJ sold the shares for $53,000. Both JBJ and Hoi haveFebruary 28th year-ends.
d) On March 1, 20X7, Merk Ltd. acquired 2,000 shares of Hoi Co. for $60,000. This investment represents a 30% interest in Hoi.Merk has significant influence. On November 30, 20X7, Hoi paid a $25,000 dividend to its shareholders. At December 31, 20X7, Hoi's shares were valuedat $40/share and Hoi reported net income of $150,000 for the year. On April 15, 20X8, Merk sold the shares for $106,000. Both Merkand Hoi have February 28thyear-ends.
Question 2
On January 2, 20X7, Victory Co. acquired 60% of the shares of Sauce Ltd. by issuing shares valued at $1,200,000. On this date, Sauce's building and machinery had estimated remaining useful lives of 10 years and 5 years respectively. Both Victory and Sauce use straight-line depreciation. The separate-entity statements of financial position for Victory and Sauce just prior to the acquisition are presented below.
Statements of Financial Position
As of January 1, 20X7
|
|
(Carrying Value)
|
(Carrying Value)
|
(Fair Value)
|
|
Noncurrent assets:
|
|
|
|
|
Land
|
$ -
|
$ 360,000
|
$ 640,000
|
|
Building
|
2,080,000
|
1,200,000
|
1,040,000
|
|
Accumulated depreciation
|
(320,000)
|
(400,000)
|
|
|
Machinery
|
1,400,000
|
1,040,000
|
80,000
|
|
Accumulated depreciation
|
(560,000)
|
(640,000)
|
|
|
Total noncurrent assets
|
2,600,000
|
1,560,000
|
|
|
Current assets:
|
|
|
|
|
Inventories
|
640,000
|
240,000
|
240,000
|
|
Accounts receivable
|
560,000
|
160,000
|
160,000
|
|
Cash
|
400,000
|
80,000
|
80,000
|
|
Total current assets
|
1,600,000
|
480,000
|
|
|
Total assets
|
$4,200,000
|
$2,040,000
|
|
|
|
|
|
|
|
Shareholders' Equity:
|
|
|
|
|
Common shares
|
$1,760,000
|
$ 800,000
|
|
|
Retained earnings
|
1,800,000
|
520,000
|
|
|
Total shareholders' equity
|
3,560,000
|
1,320,000
|
|
|
Noncurrent liabilities:
|
|
|
|
|
Long-term bank loan
|
-
|
400,000
|
400,000
|
|
Current liabilities:
|
|
|
|
|
A/P and accrued liabilities
|
640,000
|
320,000
|
320,000
|
|
Total liabilities
|
640,000
|
720,000
|
|
|
Total liabilities and shareholders' equity
|
$4,200,000
|
$2,040,000
|
|
The separate-entity financial statements for Victory and Sauce at the end of 20X7 are presented below.
Statements of Financial Position
As of December 31, 20X7
Statements of Financial Position
As of December 31, 20X7
Victory Co. Sauce Ltd.
|
Noncurrent assets:
|
|
|
|
Long-term loan receivable
|
$ 400,000
|
$ -
|
|
Land
|
-
|
1,080,000
|
|
Building
|
2,400,000
|
1,200,000
|
|
Accumulated depreciation
|
(360,000)
|
(480,000)
|
|
Machinery
|
1,600,000
|
1,040,000
|
|
Accumulated depreciation
|
(640,000)
|
(720,000)
|
|
Investment in Sauce Ltd.
|
1,200,000
|
____-___
|
|
Total noncurrent assets
|
4,600,000
|
2,120,000
|
|
Current assets:
|
|
|
|
Inventories
|
1,280,000
|
480,000
|
|
Amounts receivable
|
480,000
|
240,000
|
|
Cash
|
224,000
|
80,000
|
|
Total current assets
|
1,984,000
|
800,000
|
|
Total assets
|
$6,584,000
|
$2,920,000
|
|
|
|
|
|
Shareholders' Equity:
|
|
|
|
Common shares
|
$2,960,000
|
$ 800,000
|
|
Retained earnings
|
2,784,000
|
1,080,000
|
|
Total shareholders' equity
|
5,744,000
|
1,880,000
|
|
Noncurrent liabilities:
|
|
|
|
Long-term loans
|
520,000
|
800,000
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
320,000
|
240,000
|
|
Total liabilities
|
840,000
|
1,040,000
|
|
Total liabilities and shareholders' equity
|
$6,584,000
|
$2,920,000
|
Statements of Comprehensive Income
For the year ended December 31, 20X7
Victory Co. Sauce Ltd.
|
Sales
|
$16,000,000
|
$8,000,000
|
|
Dividend income
|
192,000
|
-
|
|
Other income
|
56,000
|
____-____
|
|
|
16,248,000
|
8,000,000
|
|
Cost of sales
|
8,000,000
|
4,800,000
|
|
Other operating expenses
|
7,088,000
|
2,240,000
|
|
Interest expense
|
16,000
|
80,000
|
|
Total expenses
|
15,104,000
|
7,120,000
|
|
Net income and comprehensive income
|
$ 1,144,000
|
$ 880,000
|
Statements of Change in Equity - Retained Earnings Section
Victory Co. Sauce Ltd.
|
Retained earnings, December 31, 20X6
|
$1,800,000
|
$ 520,000
|
|
Net income
|
1,144,000
|
880,000
|
|
Dividends declared
|
(160,000)
|
(320,000)
|
|
Retained earnings, December 31, 20X7
|
$2,784,000
|
$1,080,000
|
For the year ended December 31, 20X7
During 20X7, Victory and Sauce had the following transactions between them:
- On June 30, 20X7, Sauce borrowed $400,000 from Victory at an interest rate of 10% (simple interest). Interest is to be paid at the end of each calendar year. Sauce did not pay the 20X7 interest.
- During 20X7, Sauce sold $3,200,000 of goods to Victory. At the end of 2007, $800,000 of those goods were still in Victory's ending inventory.Sauce charged Victory the same price it charges all its other customers.
- During 20X7, Victory sold $1,600,000 of goods to Sauce. At the end of 20X7, $320,000 of those goods were still in Sauce's ending inventory.Victory charged
Sauce the same price it charges all its other customers.
There was no impairment of goodwill for 20X7.
The separate-entity financial statements for Victory and Sauce at the end of 20X8 are presented below.
Statements of Financial Position
As of December 31, 20X8
|
Noncurrent assets:
|
|
|
|
Land
|
$ -
|
$1,080,000
|
|
Building
|
3,040,000
|
1,200,000
|
|
Accumulated depreciation
|
(449,600)
|
(560,000)
|
|
Machinery
|
1,840,000
|
1,500,000
|
|
Accumulated depreciation
|
(544,000)
|
(516,000)
|
|
Investment in Sauce
|
1,200,000
|
____-___
|
|
Total noncurrent assets
|
5,086,400
|
2,704,000
|
|
Current assets:
|
|
|
|
Inventories
|
1,040,000
|
440,000
|
|
Accounts receivable
|
960,000
|
616,000
|
|
Cash
|
510,400
|
420,000
|
|
Total current assets
|
2,512,400
|
1,476,000
|
|
Total assets
|
$7,598,800
|
$4,180,000
|
|
|
|
|
|
Shareholders' Equity:
|
|
|
|
Common shares
|
$2,960,000
|
$ 800,000
|
|
Retained earnings
|
2,784,000
|
1,640,000
|
|
Total shareholders' equity
|
5,744,000
|
2,440,000
|
|
Noncurrent liabilities:
|
|
|
|
Long-term loan
|
1,440,000
|
960,000
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
414,800
|
780,000
|
|
Total liabilities
|
1,854,800
|
1,740,000
|
|
Total liabilities and shareholders' equity
|
$7,598,800
|
$4,180,000
|
Statements of Comprehensive Income
For the year ended December 31, 20X8
Victory Co. Sauce Ltd.
|
Sales
|
$17,600,000
|
$8,800,000
|
|
Dividend income
|
288,000
|
-
|
|
Gain on sale of machine
|
80.000
|
|
|
Other income
|
96,000
|
____-____
|
|
|
18,064,000
|
8,800,000
|
|
Cost of sales
|
10,400,000
|
5,280,000
|
|
Other operating expenses
|
6,912,000
|
2,336,000
|
|
Interest expense
|
160,000
|
144,000
|
|
Total expenses
|
17,472,000
|
7,760,000
|
|
Net income and comprehensive income
|
$ 592,000
|
$ 1,040,000
|
Statements of Change in Equity - Retained Earnings Section
For the year ended December 31, 20X8
Victory Co. Sauce Ltd.
|
Retained earnings, December 31, 20X7
|
$2,784,000
|
$1,080,000
|
|
Net income
|
592,000
|
1,040,000
|
|
Dividends declared
|
(592,000)
|
(480,000)
|
|
Retained earnings, December 31, 20X8
|
$2,784,000
|
$1,640,000
|
Additional information for 20X8:
- During 20X8, Victory purchase $1,280,000 in goods from Sauce. At the end of the year, half of these goods were still in Victory's inventory.
- During December 20X8, Sauce purchased $320,000 in goods from Victory. At the end of the year, all of these goods were still in Sauce's inventory.
- Both Victory and Sauce's gross margins for these goods were unchanged from previous years.
- At the end of 20X8, Sauce did not pay the interest due on the loan from Victory, however, both companies had accrued the interest.
Required:
a) Prepare a consolidated statement of financial position at the acquisition date.
b) Prepare a set of consolidated financial statements for 20X7.
c) Calculate Victory's consolidated retained earnings for 20X8. Do not prepare financial statements.
Note: Need only second question