Problem: On January 1, Year 1, Par Ltd. purchased 80% of the outstanding common shares of Son Company for $900 in cash. On the date of the purchase, Son had common shares of $380 and retained earnings of $260.
Son has a new patent that is not recorded in its books but has a fair value of $150. The patent rights extend for another 3 years. The carrying values of Son's assets and liabilities were equal to their fair values except for the following items:
Carrying value Fair value
Inventory 400 350
Equipment 600 700
Bond payable 300 380
The equipment has an expected remaining useful life of 10 years and the bond payable matures Dec. 31 Yr 4. Due to economic changes the annual goodwill impairment tests resulted in a $10 loss in Yr 2 and a $20 loss in Yr 3.
At December 31, Year 3, Son owed Par $200 in an interest-bearing note at 5% (note was issued in Year 2). During Year 3, Par paid $200 in dividends and Son paid $100 in dividends.
The balance sheets and income statements for both companies for the year ended Year 3 are as follows:
Balance Sheets At December 31, Year 3
Par Ltd. Son Company
Assets Cash $ 500 $ 350
Accounts receivable 1,000 400
Notes receivable 800 0
Inventory 900 800
Land 600 500
Equipment 6,000 2,980
Accumulated depreciation 1,000 500
Investment in Son (cost basis) 900 -
Total $ 9,700 $ 4,530
Liabilities & Shareholders' equity
Accounts payable $ 700 $ 500
Notes payable 0 300
Bonds payable 2,000 2,700
Common shares 5,000 380
Retained earnings 2,000 650
Total $ 9,700 $ 4,530
Income Statements
For the year ended December 31, Year 3
Par Ltd. Son Company
Sales $ 7,980 $ 5,000
Other income 100 0
Cost of goods sold 5,000 2,700
Depreciation/amortization expense 980 500
Administration expense 480 300
Other expenses 600 900
Income tax expense 260 200
Net income $ 760 $ 400
Required:
1. Prepare the calculation and allocation of the acquisition differential and the AD amortization/impairment schedules
2. Calculate the consolidated net income for Year 3
3. Calculate the consolidated retained earnings at January 1, Year 3
4. Prepare the three (3) consolidated financial statements for Par, December 31, Year 3, using the direct method (in good format and write out all words completely)
Hints: Goodwill = $365. AD left Dec. 31, Year 3 = $385. Total Consolidated Assets = $13,535. Given 2 separate lines for Equipment less accumulated depreciation on Cons B/S hence cannot net.