PROBLEM 1 - Fargus Corporation owned 51% of the voting common stock of Sanatee, Inc. The parent's interest was acquired several years ago on the date that the subsidiary was formed. Consequently, no goodwill or other allocation was recorded in connection with the acquisition price.
On January 1, 2010, Sanatee sold $1,400,000 in ten-year bonds to the public at 108. The bonds pay a 10% interest rate every December 31 and were sold to yield 8.76624%. Fargus acquired 40% of these bonds on January 1, 2012, for 95% of the face value. Based upon this purchase price, Fargus will receive a 10.9706% return on its investment. Both companies utilized the effective interest method of amortization. Fargus accounts for its investment in Sanatee using the initial value method.
REQUIRED:
(1) In good form, prepare amortization schedules through December 31, 2015 for both the parent and subsidiary, rounding all figures to the nearest dollar.
(2) In good form, prepare the consolidation elimination entries needed in connection with these intra-entity bonds at December 31, 2012.
(3) In good form, prepare the consolidation elimination entries needed in connection with these intra-entity bonds at December 31, 2015.
PROBLEM 2 - Several years ago Polar Inc. acquired an 80% interest in Icecap Corp. The book values of Icecap's asset and liability accounts at that time were considered to be equal to their fair values. Polar's acquisition value corresponded to the underlying book value of Icecap so that no allocations or goodwill resulted from the transaction. The following selected account balances are from the individual financial records of these two companies as of December 31, 2012:
|
POLAR
INC.
|
ICECAP CORP.
|
|
Sales
|
896,000
|
504,000
|
|
Cost of Goods Sold
|
406,000
|
276,000
|
|
Operating Expenses
|
210,000
|
147,000
|
|
Retained Earnings, 1/1/2012
|
1,036,000
|
252,000
|
|
Inventory
|
484,000
|
154,000
|
|
Land
|
250,000
|
100,000
|
|
Buildings, net
|
501,000
|
220,000
|
|
Investment Income
|
not given
|
|
The following transactions have occurred between Polar and Icecap. Polar accounts for its investment in Icecap using the initial value method:
(a) Icecap sells inventory to Polar at a markup equal to 25% of cost. Intra-entity transfers were $130,000 in 2011 and $165,000 in 2012. Of this inventory, $39,000 of the 2011 transfers were retained and then sold by Polar in 2012, while $55,000 of the 2012 transfers were held until 2013.
(b) Polar sold a building to Icecap on January 1, 2010 for $112,000, although the book value of this asset was only $70,000 on that date. The building had a five-year remaining useful life and was to be depreciated using the straight-line method with no salvage value.
(c) Icecap sold land to Polar on January 1, 2009 for $100,000, although the book value of this asset was only $65,000 on that date. Polar employs this land in its overall operations.
REQUIRED:
(1) In good form, prepare the consolidation elimination entries needed in connection with transactions (a) - (c) at December 31, 2012. Label those entries: Requirement (1a), (1b), and (1c), as corresponds to the original transactions.
(2) In good form, prepare a schedule showing the noncontrolling interest in the consolidated 2012 net income.
(3) In good form, prepare the consolidation elimination entries needed in connection with transactions (a) - (c) at December 31, 2013. Label those entries: Requirement (3a), (3b), and (3c), as corresponds to the original transactions.
PROBLEM 3 - On January 1, 2012, John Doeby Enterprises acquired a 55% interest in BMI, Inc. (BMI). Doeby paid for the transaction with $3 million cash and 500,000 shares of Doeby common stock (par value $1.00 per share). At the time of the acquisition, Doeby's and BMI's book values were:
|
Doeby
|
BMI
|
|
Common Stock
|
2,400,000
|
6,000,000
|
|
Additional Paid-In Capital in Excess of Par
|
12,050,000
|
10,870,000
|
|
Retained Earnings
|
2,500,000
|
100,000
|
On January 1, 2012 Doeby common stock had a market value of $14.90 per share and there was no control premium in this transaction. Any consideration transferred over book value is assigned to goodwill. BMI had the following balances on January 1, 2012.
|
Book Value
|
Fair Value
|
|
Land
|
1,700,000
|
2,550,000
|
|
Buildings, net (7-years remaining life)
|
2,700,000
|
3,400,000
|
|
Equipment, net (5-years remaining life)
|
3,700,000
|
3,300,000
|
For internal reporting purposes, Doeby employs the equity method to account for this investment.
REQUIRED:
(1) In good form, prepare a schedule showing the determination of goodwill, and the amortization and allocation amounts, related to Doeby's January 1, 2012 transaction.
(2) Assuming that BMI's pre-consolidation balances show subsidiary net income of $625,000 and dividends declared and paid of $130,000, in good form, prepare the consolidation elimination entries needed at December 31, 2012.
(3) Assume that on January 1, 2013, Doeby pays $2,000,000 to acquire another 10% of BMI's outstanding voting stock, in good form, prepare the entry Doeby will record to reflect this additional acquisition.
(4) In good form, prepare a schedule showing the computation of the noncontrolling interest in BMI immediately after Doeby's January 1, 2013 acquisition.