CASE - Use the following information to answer questions 1 through 12. Net Income and Retained Earnings Statements for Blue and Red Firms for Year Ended on Dec 31, 2007.
|
Income Statements
|
Blue Firm
|
Red Firm
|
|
Sales
|
$1,200,000
|
$650,000
|
|
Dividends income
|
36,000
|
0
|
|
$1,236,000
|
$650,000
|
|
Cost of goods sold
|
450,000
|
290,000
|
|
Sales & Admin. expenses
|
220,500
|
35,000
|
|
Tax expenses
|
130,500
|
75,000
|
|
Net income
|
$435,000
|
$250,000
|
|
Retained earnings
|
|
|
|
Balance, Jan 1
|
$625,000
|
$500,000
|
|
Net income
|
435,000
|
250,000
|
|
Dividends
|
70,000
|
45,000
|
|
Balance, Dec 31
|
$990,000
|
$705,000
|
Notes:
a. Jan 1, 2004, Blue Firm paid $1,000,000 in cash for 80 percent of the outstanding common shares of Red Firm. On the acquisition date, the market value of Red Firm's identifiable net assets was $1,225,000. Following is Balance Sheet of Red Firm on the acquisition date: Jan 1, 2004.
|
Book Value
|
Fair Value
|
|
Cash
|
$86,046
|
$86,046
|
|
Accounts receivable
|
120,000
|
120,000
|
|
Inventory
|
450,000
|
520,000
|
|
Plant assets
|
650,000
|
950,000
|
|
Customer lists
|
0
|
300,000
|
|
Total
|
$1,306,046
|
|
|
Current liabilities
|
$270,000
|
$270,000
|
|
Bonds payable*
|
519,964
|
481,046
|
|
Common shares
|
200,000
|
|
|
Retained earnings
|
316,082
|
|
|
Total
|
$1,306,046
|
|
* The bond, which has a face value of $500,000 and carries 9 percent coupon rate, was issued on Jan 1, 2003 for $523,114.398 and due on Jan 1, 2009.
b. The straight-line method is used to amortize Red Firm's assets over five years from the acquisition date while the effective interest method is used to amortize bonds (6-year bonds which carry a coupon rare of 9 percent, were issued on Jan 1, 2003).
c. A test conducted at the end of 2007 indicated that the customer lists had a market value of $180,000 (a permanent decline in market value). On Jan 1, 2007, the carrying value of the customer lists was $250,000.
d. During 2007, Red Firm sold inventory to Blue Firm and booked a 40 percent gross profit. At the end of 2007, the Blue Firm's inventory included $150,000 of items purchased from Red Firm.
e. A test at the end of 2007 showed that the book value of the goodwill is overstated by $10,000 (the decline is permanent).
f. The tax rate for 2007 was 30 percent.
Requirements:
1. The market interest rate at which the Red Firm issued its bonds on Jan 1, 2003.
2. The goodwill that should be recognized by the Blue Firm on Jan 1, 2004.
3. The total acquisition differential amortized for 2004-2006.
4. Unamortized acquisition differential at the end of 2007.
5. The consolidated net income for 2007.
6. The parent's share of the consolidated net income for 2007
7. The non-controlling interest in the net income of Red Firm for 2007.
8. The consolidated retained earnings on Jan 1, 2007.
9. The consolidated retained earnings on Dec 31, 2007.
10. The non-controlling shareholders' interest on Dec 31 2007 assuming common shares of Red Firms are still the same as on the date of the acquisition.
11. The carrying value of the bonds that should be shown on the consolidated balance sheet on Dec 31, 2007.
12. Prepare the consolidated income statement for the year ended on Dec 31, 2007.