On January 1, 20X4, Chee Co. purchased 80% of the outstanding shares of Tyme Ltd. for $2,000,000 in cash. On the acquisition date, Tyme's shareholders' equity consisted of the following:
Common shares $1,600,000
Retained earnings 800,000
At the time of acquisition, the carrying values of Tyme's identifiable net assets equalled their fair market values with the following exceptions:
- The fair value of a building with an estimated remaining life of 10 years was $480,000 less than its carrying value.
- A long-term liability that matures in 8 years has a fair value that is $400,000 less than its carrying value.
The condensed income statements for Chee and Tyme are presented below:
Income Statements
Year ended December 31, 20X8
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Chee Co.
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Tyme Ltd.
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Sales
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$1,600,000
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$ 720,000
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Investment income
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800,000
|
80,000
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Gain on sale of land
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___-___
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54,400
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Total revenue
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2,400,000
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854,400
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Cost of goods sold
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1,040,000
|
400,000
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Other expenses
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768,000
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256,000
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Total expenses
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1,808,000
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656,000
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Net income
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mce_markernbsp; 592,000
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$ 198,400
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Additional information:
- At the beginning of 20X5, Chee acquired a piece of equipment from Tyme for $168,000. Tyme had purchased the equipment 5 years ago for $320,000. When Tyme purchased the equipment, it had expected that it would have a useful life of 20 years, with no residual value. Chee concurred with this estimate (i.e., at the time of purchase, Chee expected that the equipment would have a remaining useful life of 15 years). Both Tyme and Chee use the straight-line method of amortization.
- Sale of goods from Chee to Tyme:
Gross Unsold Goods in Tyme's
Year Sales Margin Inventory at Year-End
20X7 $400,000 30% $80,000
20X8 320,000 30% 72,000
- Sale of goods from Tyme to Chee:
Gross Unsold Goods in Chee's
Year Sales Margin Inventory at Year-End
20X7 $240,000 40% $56,000
20X8 200,000 40% 48,000
- All goods in inventory at year-end were sold to third parties in the subsequent year.
- On August 31, 20X8, Chee purchased a tract of land from Tyme for $106,400 in cash. Tyme had acquired the land 12 years previously for $52,000.
- During 20X8, Chee declared and paid dividends of $200,000 and Tyme declared and paid dividends of $32,000.
- There was no impairment of goodwill at the end of 20X8.
- Chee accounts for its investments using the cost method and uses the entity theory method to report its business combinations.
Required:
a) Prepare a consolidated income statement for Chee Co. for the year ended December 31, 20X8. Be sure to show your supporting calculations.
b) Prove that your calculation of net income attributable to the shareholders of Chee Co. in (a) is correct by calculating Chee's net income using the equity method.