problem 1balance sheetsdecember 31


Problem 1

Balance Sheets

December 31, 20X6

 

Peony

Ltd.

Aster

Ltd.

Assets:

 

 

Cash

$     62,500

$     25,000

Accounts receivable

187,500

200,000

Inventories

225,000

125,000

Equipment

6,250,000

3,375,000

Accumulated amortization

(2,212,500)

(1,550,000)

Investment in Aster Ltd.

1,000,000

-

Other investments

125,000

____-____

     Total assets

$5,637,500

$2,175,000

Liabilities and Shareholders' Equity

 

 

Accounts payable

$   562,500

$   250,000

Bonds payable

375,000

625,000

     Total liabilities

937,500

875,000

Common shares

1,500,000

375,000

Retained earnings

3,200,000

925,000

     Total shareholders' equity

4,700,000

1,300,000

Total liabilities and shareholders' equity

$5,637,500

$2,175,000

Income Statements

Year Ended December 31, 20X6

 

Peony

Ltd.

Aster

Ltd.

Sales revenue

$2,500,000

$1,875,000

Royalty revenue

187,500

-

Dividend income

93,750

____-____

      Total revenue

2,781,250

1,875,000

Cost of sales

1,500,000

1,125,000

Other expenses

700,000

513,750

      Total expenses

2,200,000

1,638,750

Net income

$   581,250

236,250

Statements of Retained Earnings

December 31, 20X6

 

Peony

Ltd.

Aster

Ltd.

Retained earnings, beginning of year

$2,993,750

$ 801,250

Net income

581,250

236,250

Dividends declared

(375,000)

(112,500)

Retained earnings, end of year

$3,200,000

$ 925,000

  • At January 1, 20X1, Peony Ltd. acquired 80% of the common shares of Aster Ltd. by issuing 500,000 Peony common shares valued at $2 per share. This resulted in Peony having 1,500,000 issued and outstanding shares.
  • Peony has provided the following information about Aster at the acquisition date:

    Aster's shareholders' equity consisted of the following:

                    Common shares          $375,000
                    Retained earnings          693,750

    Fair value of Aster's net identifiable assets equalled their carrying value, with the exception of the following items:

                                                    Excess of fair value
                                                    over carrying value:
                    Inventories                         $ 12,500
                    Equipment                             93,750
                    Investments                          12,500

    The accumulated amortization on the equipment was $718,750.  The equipment is amortized on a straight-line basis.  At the acquisition date, the equipment is estimated to have a remaining life of 10 years with no residual value.
  • In 20X3, Aster sold its investments to parties outside the consolidated entity for $56,250 over carrying value.
  • From the acquisition date to December 31, 20X5, Aster paid royalties of $625,000 to Peony.  During 20X6, Aster paid $112,500 in royalties to Peony.
  • At the beginning of 20X4, Peony purchased some equipment from Aster for $113,750.  Aster had originally acquired the equipment for $125,000 and was amortizing it at a rate of $12,500 per year.  When Aster sold the equipment to Peony, it had a carrying value of $87,500.  At that time, Peony estimated that the equipment had a remaining life of 7 years and started amortizing the equipment in 20X4, using the straight-line method with no residual value.
  • At December 31, 20X5, Aster's inventory included $25,000 of goods purchased from Peony.  Peony's gross margin on the sale was 40%.  The goods were sold to third parties in 20X6.
  • At December 31, 20X5, Peony's inventory included $125,000 of goods purchased from Aster.  Aster's gross margin on the sale was 40%.  The goods were sold to third parties in 20X6.
  • During 20X6, Peony sold goods to Aster for $125,000.  Peony's gross margin on the sale was 40%.  At December 31, 20X6, $50,000 of the goods are still in Aster's inventory.
  • During 20X6, Aster sold goods to Peony for $875,000.  Aster's gross margin on the sale was 40%.  At December 31, 20X6, $87,500 of the goods are still in Peony's inventory.
  • Peony uses the entity method to report business combinations.

Required:

Prepare the consolidated financial statements for Peony at December 31, 20X6 using the direct method.  Show all your work. Ignore income taxes.

Problem 2

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

 

Chee Co.

Tyme Ltd.

Sales

$1,600,000

$ 720,000

Investment income

800,000

80,000

Gain on sale of land

___-___

54,400

    Total revenue

2,400,000

854,400

Cost of goods sold

1,040,000

400,000

Other expenses

768,000

256,000

    Total expenses

1,808,000

656,000

    Net income

592,000

$ 198,400


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.

Problem 3

At the beginning of 20X3, Jong Ltd. acquired 80% of the outstanding shares of Nye Co. for $1,400,000.  At the acquisition date, Nye's shareholders' equity consisted of the following:

                        Common shares          $350,000

                        Retained earnings          875,000

At the time of acquisition, all of Nye's net identifiable assets had carrying values that equalled their fair values with the exception of its patents.  The fair value of the patents exceeded their carrying values by $525,000 and had a remaining life of 8 years. 

The trial balances for Jong and Nye for December 31, 20X6 are as follows:

                                        Jong Ltd.                 Nye Co.

 

DR

CR

DR

CR

Cash

    700,000

 

    350,000

 

Accounts receivable

1,400,000

 

249,200

 

Inventory

2,100,000

 

1,575,000

 

Plant and equipment

9,800,000

 

1,750,000

 

Accumulated amortization

 

2,800,000

 

700,000

Patents

 

 

280,000

 

Investment in Nye

1,400,000

 

 

 

Investment in Jong bonds

 

 

170,800

 

Accounts payable

 

1,744,400

 

1,734,950

Bonds payable

 

350,000

 

 

Premium on bonds payable

 

5,600

 

 

Common shares

 

3,150,000

 

350,000

Retained earnings

 

7,000,000

 

1,400,000

Dividends

420,000

 

175,000

 

Sales

 

3,430,000

 

1,400,000

Dividend revenue

 

140,000

 

 

Interest revenue

 

 

 

15,050

Cost of goods sold

1,680,000

 

595,000

 

Operating expenses

673,400

 

210,000

 

Interest expense

26,600

 

 

 

Income tax expense

420,000

_________

245,000

________

 

18,620,000

18,620,000

5,600,000

5,600,000

Additional information:

  • 20X6 net income for Jong is $770,000 and for Nye, $365,050.
  • At the beginning of 20X6, Jong purchased a piece of equipment from Nye for $350,000.  At the time of purchase, the equipment had a net book value of $280,000 to Nye and an estimated useful life of 5 years.
  • At the end of 20X5, Jong's inventory included $350,000 of goods purchased from Nye.  Nye's had recorded a gross profit of $140,000 on this sale.
  • During 20X6, Nye sold goods to Jong for $700,000.  Nye earned a gross profit of $280,000 on this sale.
  • At the end of 20X6, Jong had sold all the goods in its opening inventory to third parties but still had $210,000 of the goods purchased from Nye during 20X6 in its ending inventory.  All of those goods will be sold to third parties in 20X7.
  • Amortization expense for the plant, equipment, and patent are included in operating expenses.
  • At the beginning of 20X4, Jong issued bonds for $359,800.  These bonds have an interest rate of 8%, mature in 7 years, and have a face value of $350,000.  Interest will be paid annually at the end of the year.  Nye purchased half of these bonds at the beginning of 20X6 for $169,750.  Any intercompany gains or losses on these bonds are to be allocated between the two companies.
  • Both companies have an average income tax rate of 40%.

Required:

Assume that Jong used the equity method of accounting for its investment in Nye instead of the cost method.  Calculate the balance of its "Investment in Nye" account.

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Financial Accounting: problem 1balance sheetsdecember 31
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