On January 1, 2009, Daisy Company acquired 80 percent of Rose Company for $594,000 in cash. Rose's total book value on that date was $610,000 and the fair value of the noncontrolling interest was $148,500. The newly acquired subsidiary possessed a trademark (10-year remaining life) that, although unrecorded on Rose's accounting records, had a fair value of $75,000. Any remaining excess acquisition-date fair value was attributed to goodwill.
Daisy decided to acquire Rose so that the subsidiary could furnish component parts for the parent's production process. During the ensuing years, Rose sold inventory to Daisy as follows:
|
Year
|
Cost to Rose
Company
|
Transfer Price
|
Gross Profit Rate
|
Transferred Inventory
Still Held at End of Year (at transfer price)
|
|
2009
|
$100,000
|
$140,000
|
28.6%
|
$20,000
|
|
2010
|
100,000
|
150,000
|
33.3
|
30,000
|
|
2011
|
120,000
|
160,000
|
25.0
|
68,000
|
Any transferred merchandise that Daisy retained at a year-end was always put into production during the following period.
On January 1, 2010, Daisy sold Rose several pieces of equipment that had a 10-year remaining life and were being depreciated on the straight-line method with no salvage value. This equipment was transferred at an $80,000 price, although it had an original $100,000 cost to Daisy and a $44,000 book value at the date of exchange.
On January 1, 2011, Daisy sold land to Rose for $50,000, its fair value at that date. The original cost had been only $22,000. By the end of 2011, Rose had made no payment for the land.
The following separate financial statements are for Daisy and Rose as of December 31, 2011. Daisy has applied the equity method to account for this investment.
|
Daisy Company
|
Rose Company
|
|
Sales
|
$ (900,000)
|
$ (500,000)
|
|
Cost of goods sold
|
598,000
|
300,000
|
|
Operating expenses
|
210,000
|
80,000
|
|
Gain on sale of land
|
(28,000)
|
-0-
|
|
Income of Rose Company
|
(60,000)
|
-0-
|
|
Net income
|
$ (180,000)
|
$ (120,000)
|
|
Retained earnings, 1/1/11
|
$ (620,000)
|
$ (430,000)
|
|
Net income
|
(180,000)
|
(120,000)
|
|
Dividends paid
|
55,000
|
50,000
|
|
Retained earnings, 12/31/11
|
$ (745,000)
|
$ (500,000)
|
|
Cash and accounts receivable
|
$ 348,000
|
$ 410,000
|
|
Inventory
|
430,400
|
190,000
|
|
Investment in Rose Company
|
737,600
|
-0-
|
|
Land
|
454,000
|
280,000
|
|
Equipment
|
270,000
|
190,000
|
|
Accumulated depreciation
|
(180,000)
|
(50,000)
|
|
Total assets
|
$ 2,060,000
|
$ 1,020,000
|
|
Liabilities
|
(715,000)
|
(120,000)
|
|
Common stock
|
(600,000)
|
(400,000)
|
|
Retained earnings, 12/31/11
|
(745,000)
|
(500,000)
|
|
Total liabilities and equities
|
$(2,060,000)
|
$(1,020,000)
|
Required
Answer the following questions:
a. By how much did Rose's book value increase during the period from January 1, 2009, through December 31, 2010?
b. During the initial years after the takeover, what annual amortization expense was recognized in connection with the acquisition-date excess of fair value over book value?
c. What amount of unrealized gross profit exists within the parent's inventory figures at the beginning and at the end of 2011?
d. Equipment has been transferred between the companies. What amount of additional depreciation is recognized in 2011 because of this transfer?
e. The parent reports Income of Rose Company of $60,000 for 2011. How was this figure calculated?
f. Without using a worksheet, determine consolidated totals.
g. Prepare the worksheet entries required at December 31, 2011, by the transfers of inventory, land, and equipment.