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Consolidations Problem (80 marks): Parent Ltd. purchased 75% of Sub Ltd.'s voting stock on January 1, Year 4 for $150,000. The annual financial statements of Parent Ltd. and Sub Ltd. for the year ended December 31, Year 9 are presented below: Balance Sheets December 31, Year 9 Parent Ltd. Sub Ltd. Assets Cash $ 14,000 s 16,800 Receivables 25,000 21,000 Inventory 45,000 50.000 Property, plant, and equipment 195,000 260,000 Accumulated depreciation (35,000) (40,000) Other assets 79,600 Investment in Sub 150,000 $ 473,600 $ 307,800 Liabilities and Shareholders' equity Current liabilities $ 36,400 $ 37,800 Long-term liabilities 102,500 Common shares 350,000 125,000 Retained earnings 87,200 42,500 $ 473.600 $ 307,800 Retained earnings, Jan. 1 Net income Dividends Retained earnings, Dec. 31 Statements of Retained Earnings For the year ended December 31, Year 9 Parent Ltd. 77,600 34,600 25,000 $ 87.200 Sub Ltd. 25,000 29,500 12,000 $42.500 Income Statements For the year ended December 31, Year 9 Parent Ltd. $ 430,200 42,400 472,600 Sub Ltd. $ 270,000 Sales revenue Other income 270.000 Cost of goods sold Depreciation expense General and administration expenses Interest expense Income taxes expense 350,000 18,000 57,000 173,000 28,000 19,000 9,500 11.000 240,500 29,500 13,000 438,000 $ 34,600 Net income Additional information: 1. On the date of acquisition, Sub reported a retained earnings balance of $25,000 and common stock of $125,000. Sub's net assets were equal to fair market value except for equipment which was undervalued on the accounting records in the amount of $15,000 and land which was overvalued on the accounting records in the amount of $10,000. The equipment had an estimated useful life of 10 years as of the date of acquisition. The accumulated depreciation, on the date of acquisition for the sub's property, plant, and equipment, was $15,000. 2. Annual impairment tests of goodwill resulted in the recognition of impairment losses of $12,000 in Year 7 and $7,000 in Year 9. 3. On March 1, Year 9, Sub borrowed $10,000 from Parent. The one-year note had interest rate of 9%. The principal and interest are payable within a year of fiscal year end. 4. Subsidiary's dividends were declared and paid for the current year. 5. Sub's sales during Year 9 included $130,000 of sales to Parent. Goods purchased from Sub and that were included in Parent's inventories were $60,000 at the end of Year 8 and $55,000 at the end of Year 9. Sub's mark up on sales to Parent is 35%. 6. On May 1, Year 9, Parent sold equipment to Sub for $95.000. The book value of the equipment on Parent's records at date of sale was $60,000. The remaining useful life of the equipment on that date was 5 years. 7. On January 1, Year 8, Sub sold a building to Parent for $79,000. The book value of the building on Sub's records at date of sale was $110,000. The remaining useful life of the building on that date was 20 years. 8. Parent uses the cost method. 9. Assume a 25% corporate tax rate. Required: 1. Prepare the following schedules - show all your calculations preferably using the alphabet to show where you got your figures from. Round your dollar amounts to the nearest dollar. (a) Prepare the calculation and allocation of acquisition differential schedule (b) Prepare the acquisition differential amortization and goodwill impairment schedule (c) Prepare the intercompany transactions, unrealized profits on intercompany transactions and deferred taxes schedules. (d) Calculate consolidated net income for Year 9 with income attributed to parent and non-controlling interests. (e) Prepare the consolidated income statement in good form (f) Calculate consolidated retained earnings - January 1, Year 9 (9) Prepare the consolidated statement of retained earnings in good form (h) Calculate NCI (balance sheet) - method I or Method 2 (h) Prepare the consolidated balance sheet in good form. 2. Prepare the working paper eliminating journal entries for the inter-company sale of the building in Year 8. Show all your work and calculations for full marks. Consolidations Problem (80 marks): Parent Ltd. purchased 75% of Sub Ltd.'s voting stock on January 1, Year 4 for $150,000. The annual financial statements of Parent Ltd. and Sub Ltd. for the year ended December 31, Year 9 are presented below: Balance Sheets December 31, Year 9 Parent Ltd. Sub Ltd. Assets Cash $ 14,000 s 16,800 Receivables 25,000 21,000 Inventory 45,000 50.000 Property, plant, and equipment 195,000 260,000 Accumulated depreciation (35,000) (40,000) Other assets 79,600 Investment in Sub 150,000 $ 473,600 $ 307,800 Liabilities and Shareholders' equity Current liabilities $ 36,400 $ 37,800 Long-term liabilities 102,500 Common shares 350,000 125,000 Retained earnings 87,200 42,500 $ 473.600 $ 307,800 Retained earnings, Jan. 1 Net income Dividends Retained earnings, Dec. 31 Statements of Retained Earnings For the year ended December 31, Year 9 Parent Ltd. 77,600 34,600 25,000 $ 87.200 Sub Ltd. 25,000 29,500 12,000 $42.500 Income Statements For the year ended December 31, Year 9 Parent Ltd. $ 430,200 42,400 472,600 Sub Ltd. $ 270,000 Sales revenue Other income 270.000 Cost of goods sold Depreciation expense General and administration expenses Interest expense Income taxes expense 350,000 18,000 57,000 173,000 28,000 19,000 9,500 11.000 240,500 29,500 13,000 438,000 $ 34,600 Net income Additional information: 1. On the date of acquisition, Sub reported a retained earnings balance of $25,000 and common stock of $125,000. Sub's net assets were equal to fair market value except for equipment which was undervalued on the accounting records in the amount of $15,000 and land which was overvalued on the accounting records in the amount of $10,000. The equipment had an estimated useful life of 10 years as of the date of acquisition. The accumulated depreciation, on the date of acquisition for the sub's property, plant, and equipment, was $15,000. 2. Annual impairment tests of goodwill resulted in the recognition of impairment losses of $12,000 in Year 7 and $7,000 in Year 9. 3. On March 1, Year 9, Sub borrowed $10,000 from Parent. The one-year note had interest rate of 9%. The principal and interest are payable within a year of fiscal year end. 4. Subsidiary's dividends were declared and paid for the current year. 5. Sub's sales during Year 9 included $130,000 of sales to Parent. Goods purchased from Sub and that were included in Parent's inventories were $60,000 at the end of Year 8 and $55,000 at the end of Year 9. Sub's mark up on sales to Parent is 35%. 6. On May 1, Year 9, Parent sold equipment to Sub for $95.000. The book value of the equipment on Parent's records at date of sale was $60,000. The remaining useful life of the equipment on that date was 5 years. 7. On January 1, Year 8, Sub sold a building to Parent for $79,000. The book value of the building on Sub's records at date of sale was $110,000. The remaining useful life of the building on that date was 20 years. 8. Parent uses the cost method. 9. Assume a 25% corporate tax rate. Required: 1. Prepare the following schedules - show all your calculations preferably using the alphabet to show where you got your figures from. Round your dollar amounts to the nearest dollar. (a) Prepare the calculation and allocation of acquisition differential schedule (b) Prepare the acquisition differential amortization and goodwill impairment schedule (c) Prepare the intercompany transactions, unrealized profits on intercompany transactions and deferred taxes schedules. (d) Calculate consolidated net income for Year 9 with income attributed to parent and non-controlling interests. (e) Prepare the consolidated income statement in good form (f) Calculate consolidated retained earnings - January 1, Year 9 (9) Prepare the consolidated statement of retained earnings in good form (h) Calculate NCI (balance sheet) - method I or Method 2 (h) Prepare the consolidated balance sheet in good form. 2. Prepare the working paper eliminating journal entries for the inter-company sale of the building in Year 8. Show all your work and calculations for full marks

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