Problem 1
At the beginning of 20X2, Dahl Ltd. acquired 8% of the outstanding common shares of Tippy Ltd. for $400,000. This amounted to 80,000 shares.
At the beginning of 20X4, Dahl acquired an additional 270,000 shares of Tippy for $1,512,000. At this acquisition date, Tippy's shareholders' equity consisted of the following:
4% non-cumulative preferred shares $1,000,000
Common shares, 1,000,000 outstanding shares 2,400,000
Retained earnings 2,160,000
At this acquisition date, the fair values of the net identifiable assets equalled their carrying values except for the following:
Excess of fair value
over carrying value
Inventory $ 96,000
Land 800,000
At the beginning of 20X5, Dahl acquired an additional 450,000 shares of Tippy for 2,880,000. The shares were trading for $6 per share. At this acquisition date, Tippy's shareholders' equity consisted of the following:
4% non-cumulative preferred shares $1,000,000
Common shares, 1,000,000 outstanding shares 2,400,000
Retained earnings 2,560,000
At this acquisition date, the fair values of the net identifiable assets equalled their carrying values except for the following:
Excess of fair value over/(under)
carrying value
Accounts receivable $W(48,000)
Building and equipment (net) 720,000
Long-term debt 160,000
The building and equipment have an estimated remaining life of 10 years and the long-term debt matures in 10 years.
The condensed separate-entity financial statements for December 31, 20X6 are as follows:
Balance Sheets
As at December 31, 20X6
|
|
Dahl Ltd.
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Tippy Ltd.
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Assets:
|
|
|
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Cash
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$ 400,000
|
$ 560,000
|
|
Accounts receivable
|
1,920,000
|
440,000
|
|
Inventories
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400,000
|
320,000
|
|
Land
|
4,400,000
|
800,000
|
|
Buildings and equipment (net)
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8,488,000
|
7,200,000
|
|
Investment in Tippy (at cost)
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4,792,000
|
____-____
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|
Total assets
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$ 20,400,000
|
$ 9,320,000
|
|
Liabilities:
|
|
|
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Accounts payable
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$ 2,400,000
|
$ 400,000
|
|
Long-term debt
|
3,200,000
|
1,600,000
|
|
Total liabilities
|
5,600,000
|
2,000,000
|
|
Shareholders' equity:
|
|
|
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4% non-cumulative preferred shares
|
-
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1,000,000
|
|
Common shares
|
7,200,000
|
2,400,000
|
|
Retained earnings
|
7,600,000
|
3,920,000
|
|
Total shareholders' equity
|
14,800,000
|
7,320,000
|
|
Total liabilities and shareholders' equity
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$ 20,400,000
|
$ 9,320,000
|
Income Statements
Year Ended December 31, 20X6
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Dahl Ltd.
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Tippy Ltd.
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Sales
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$ 12,000,000
|
$ 7,200,000
|
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Dividend income
|
96,000
|
-
|
|
Gain on sale of equipment
|
_______
|
168,000
|
|
Total revenue
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12,096,000
|
7,368,000
|
|
Cost of goods sold
|
7,600,000
|
4,960,000
|
|
Operating expenses
|
2,374,400
|
944,000
|
|
Income tax expense
|
825,600
|
584,000
|
|
Total expenses
|
10,800,000
|
6,488,000
|
|
Net income
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$ 1,296,000
|
$ 880,000
|
Additional information:
- Dahl and Tippy declared and paid dividends during 20X6 of $400,000 and $160,000, respectively.
- At the end of 20X5, the inventories of Dahl and Tippy included goods with intercompany profits of $68,000 and $152,000 respectively.
- During 20X6, Dahl sold goods to Tippy for $3,120,000 at a gross margin of 45%. At the end of 20X6, $200,000 of these goods were still in Tippy's inventory.
- During 20X6, Tippy sold goods to Dahl for $2,080,000 at a gross margin of 35%. At the end of the year, $320,000 of these goods were still in Dahl's inventory.
- On January 1, 20X6, Tippy sold some equipment to Dahl for $360,000. At that time, the equipment had a book value of $192,000 and an estimated remaining life of 8 years. Dahl has paid Tippy $252,000 and will pay the balance on January 31, 20X7.
- Both Dahl and Tippy use the straight-line method of amortization for their buildings and equipment.
- In 20X5, a goodwill impairment of $73,600 was recognized and a further impairment of $46,400 occurred in 20X6. Impairment losses are allocated 80% to Dahl and 20% to the non-controlling interest.
- Both companies are taxed at an average rate of 40%.
Required:
Calculate Dahl's 20X6 consolidated net income and identify the amount attributable to Dahl's shareholders and to the non-controlling interest. Be sure to show all your calculations. You are not required to prepare a consolidated income statement.