Question 1 -
On January 1, 2012, Cranbrook Corporation acquired 75% of the outstanding common shares of Creston Company for a cash payment of $6,000,000. Costs associated with the acquisition amounted to $600,000. On that date, Creston's balance sheet included common shares of $4,400,000 and retained earnings of $2,200,000. The identifiable net assets of Creston were equal to their book values except that capital assets had a fair value that was $600,000 greater than their carrying value. These capital assets had a remaining life of twenty years and no significant anticipated residual value after that time. Inventories had a fair value which was $150,000 less than their book value. These inventories were all sold by the end of 2012. In addition, long-term debt had a fair value that was $170,000 greater than its carrying value. The long-term debt matures on June 30, 2020. Goodwill arising from the business combination was assessed annually for impairment. The only impairment since the acquisition date amounted to $100,000 in 2015.
Following are the statements of income and retained earnings for the year ended December 31, 2015:
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Cranbrook Corporation
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Creston Company
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|
Total revenues
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$5,150,000
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$2,000,000
|
|
Cost of goods sold
|
2,750,000
|
1,000,000
|
|
Amortization expense
|
970,000
|
350,000
|
|
Other expense
|
700,000
|
300,000
|
|
Income tax expense
|
280,000
|
150,000
|
|
|
4,700,000
|
1,800,000
|
|
Net income
|
450,000
|
200,000
|
|
Opening retained earnings
|
4,800,000
|
2,400,000
|
|
Dividends
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250,000
|
160,000
|
|
Ending retained earnings
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$5,000,000
|
$2,440,000
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The following balances were taken from the statements of financial position as at December 31, 2015:
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Cranbrook Corporation
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Creston Company
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|
Accounts receivable
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$2,000,000
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$265,000
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|
Inventories
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2,875,000
|
1,500,000
|
|
Capital assets (net)
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7,000,000
|
2,500,000
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|
Patents (net)
|
500,000
|
-
|
|
Land
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900,000
|
700,000
|
|
Long-term liabilities
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3,500,000
|
1,500,000
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Additional information:
- Cranbrook uses the cost method to account for its investment in Creston and values the non-controlling interest in Creston based on the fair value of its identifiable net assets at acquisition (the parent company extension approach).
- Both companies pay income tax at a marginal rate of 30%. Cranbrook fully accounts for all deferred (future) income taxes arising from intercompany transactions but does not account for the deferred tax balances arising from the allocation and subsequent amortization/impairment of the acquisition differential.
- On January 1, 2014, Creston sold a patent to Cranbrook for $330,000. On that date, the patent had carrying value of $370,000 and a remaining economic life of five years.
- During 2015, Cranbrook sold inventory to Creston for $300,000. The unrealized profits in Creston's inventory on January 1, 2015, amounted to $30,000 and on December 31, 2015, amounted to $50,000. At December 31, 2015, Creston owed Cranbrook $20,000 for inventory purchases during 2015.
- On September 1, 2015, Cranbrook sold some land to Creston for $206,000. The land had a carrying value of $164,000 immediately before the sale. Creston still owned this land at the end of 2015.
- Neither company issued any common shares at any date later than December 31, 2011.
- During 2015, Cranbrook Corporation charged Creston Company $150,000 for management services.
- Management services expense and patent amortization are both included in other expenses.
REQUIRED:
a) Prepare a consolidated statement of income and retained earnings for Cranbrook Corporation and its subsidiary Creston Company for the year ended December 31, 2015.
b) Calculate the following balances that would appear in the consolidated statement of financial position of Cranbrook Corporation and its subsidiary Creston Company as at December 31, 2015:
i) noncontrolling interest
ii) patents
iii) land
iv) long-term liabilities
v) net deferred income tax asset/liability
c) What amount would Cranbrook Corporation report as its net income for 2015 if it used the equity method to account for its investment in Creston Company?
Question 2 -
On January 2, 2011, Pelican Inc. acquired 80% of the 100,000 outstanding common shares of Spurs Company for $3,200,000. Immediately after the purchase, shares of Spurs Company were trading for $36 each. On that date, Spurs Company's balance sheet included common shares of $2,000,000 and retained earnings of $1,200,000. All of the company's assets and liabilities had fair values equal to their book values except that land with a carrying value of $100,000 had a fair value of $200,000, inventories with a carrying value of $160,000 had a fair value of $120,000 and long-term debt carried on the balance sheet at $300,000 had a fair value of $260,000. The long-term debt matured on December 31, 2018. In addition, Spurs Company had unrecorded intangible assets which had a fair value of $200,000 and a remaining economic life of ten years. Amortization of intangibles is included in other expenses.
Following are the statements of income and retained earnings of the two companies for the year ended December 31, 2016:
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Pelican Inc..
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Spurs Co.
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Sales
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$6,000,000
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$4,000,000
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Investment income
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120,000
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-
|
|
Other revenue
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100,000
|
140,000
|
|
Total revenues
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6,220,000
|
4,140,000
|
|
Cost of goods sold
|
3,600,000
|
2,800,000
|
|
Amortization expense
|
800,000
|
800,000
|
|
Interest expense
|
100,000
|
80,000
|
|
Other expenses
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560,000
|
290,000
|
|
Loss on sale of investment
|
-
|
50,000
|
|
Income tax expense
|
340,000
|
30,000
|
|
Total expenses
|
5,400,000
|
4,050,000
|
|
Net income
|
820,000
|
90,000
|
|
Opening retained earnings
|
3,120,000
|
1,740,000
|
|
Dividends declared
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(300,000)
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(70,000)
|
|
Ending retained earnings
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$3,640,000
|
$1,760,000
|
Additional information:
- On January 1, 2011, Spurs Company purchased a machine for $200,000. The machine had an expected useful life of twenty years. On January 1, 2015, Spurs Company sold the machine to Pelican Inc. for $120,000.
- During 2016, Spurs Company sold inventory to Pelican Inc. for $800,000 of which 20% remained on hand at the end of that year. During 2016 Pelican Inc. had no sales to Spurs Company but in 2015, Pelican Inc. had sales of $250,000 to Spurs Company. Of those sales, 30% were in Spurs Company's inventory at January 1, 2016. All intercompany sales are priced to provide the selling company with a gross profit of 40%. The unrealized profit in Pelican Inc.'s inventory at January 1, 2016 amounted to $35,000.
- On September 1, 2016, Pelican Inc. sold a piece of land to Spurs Company for $100,000. The land had been purchased by Pelican Inc. at a cost of $75,000.
- On July 2, 2016, Pelican Inc. lent Spurs Company $200,000 for five years with interest at 10% paid annually on June 30 of each year that the loan is outstanding.
- Goodwill impairment was determined to have occurred as follows:
Parent's share 2014 -- $60,000; 2016 -- $40,000
Noncontrolling interest share 2014 -- $ 3,000; 2016 -- $ 1,000
- Both companies pay tax at a marginal rate of 30%. Deferred income taxes are recorded in the consolidated financial statements for all unrealized and realized gains and losses arising from intercompany transactions but are not recorded on the elements of the acquisition differential.
- Pelican Inc. accounts for its investment in Spurs Company using the cost method and values the non-controlling interest in that company based on the market value of its shares at the acquisition date.
Required:
(a) Prepare the consolidated statement of income and retained earnings for Pelican Inc. and its subsidiary, Spurs Company, for the year ended December 31, 2016.
(b) Calculate the amount of non-controlling interest that will be shown on the consolidated statement of financial position as at December 31, 2016.