Problem 1 (28 marks)
Pre-Contribution Balance Sheets and Fair Values
June 30, 20X9
(in thousands of $)
Swag Co. Perk Ltd.
Pre-
Contribution Fair
Value Pre-
Contribution Fair
Value
Assets:
Cash and cash equivalents 1,645 1,645 840 840
Accounts receivable 1,400 1,400 1,260 1,260
Land 3,500 5,950 - -
Building (net) 9,450 7,700 5,880 7,700
Equipment (net) 420 525 2,170 2,800
Total assets 16,415 10,150
Liabilities and
shareholders’ equity:
Accounts payable 455 455 770 770
Long-term debt 1,400 1,400 700 630
Total liabilities 1,855 1,470
Common shares 10,500 4,865
Retained earnings 4,060 3,815
Total shareholders’ equity 14,560 8,680
Total liabilities and
shareholders’ equity
16,415
10,150
Swag Co. acquired Perk on June 30, 20X9. Both companies have June 30 year-ends. Before the combination, Swag and Perk had, respectively, 840,000 and 525,000 common shares, issued and outstanding.
Required:
Prepare Swag’s consolidated balance sheet under each of the following independent situations:
a) Swag purchased the assets and assumed the liabilities of Perk by
paying $1,400,000 in cash and issuing a $12,600,000 note.
(6 marks)
b) Swag issued 280,000 common shares in exchange for all of
Perk’s outstanding shares. The fair value of the Swag shares
was $14,000,000. (10 marks)
c) In exchange for all of Perk’s outstanding shares, Swag paid
$700,000 cash and issued 189,000 common shares with a
market value of $9,450,000. (12 marks)
Problem 2 (50 marks)
Balance Sheets
December 31, 20X3
Green Tower
Ltd. Blue Loft
Ltd.
Assets:
Current assets:
Cash $ 156,000 $ 143,000
Accounts receivable 195,000 175,500
Inventory 312,000 253,500
Total current assets 663,000 572,000
Land 923,000 -
Equipment 897,000 1,183,000
Accumulated amortization (663,000) (416,000)
Investment in Blue Loft 1,409,200 -
Goodwill* 98,800 __-____
Total assets 3,328,000 1,339,000
Liabilities and shareholders’ equity:
Liabilities:
Accounts payable 184,600 78,000
Bonds payable 780,000 260,000
Total liabilities 964,600 338,000
Shareholders’ equity:
Common shares 650,000 325,000
Retained earnings 1,713,400 676,000
Total shareholders’ equity 2,363,400 1,001,000
Total liabilities and shareholders’ equity $3,328,000 $1,339,000
*from an acquisition prior to Blue Loft
Income Statements
Year Ended December 31, 20X3
Green Tower
Ltd. Blue Loft
Ltd.
Sales revenue $1,560,000 $1,283,100
Cost of goods sold 1,040,000 845,000
520,000 438,100
Gain on sale of land ___-___ 273,000
520,000 711,100
Operating expense 305,500 464,100
Net income 214,500 247,000
Statements of Retained Earnings
Year Ended December 31, 20X3
Green Tower
Ltd. Blue Loft
Ltd.
Retained earnings, December 31, 20X2 $1,498,900 $ 429,000
Net income 214,500 247,000
Retained earnings, December 31, 20X3 $1,713,400 $ 676,000
Blue Loft Ltd.
Carrying and Fair Values
January 1, 20X2
Carrying
Value Fair
Value
Cash $ 104,000 $ 104,000
Accounts receivable 128,700 128,700
Inventory 231,400 253,500
Land 650,000 811,000
Equipment 390,000 151,000
Accumulated amortization (260,000)
Accounts payable 91,000 91,000
Bonds payable 260,000 260,000
Common shares 325,000 -
Retained earnings 568,100 -
• On January 1, 20X2, Green Tower Ltd. acquired all the outstanding common shares of Blue Loft Ltd. for $1,409,200 cash.
• At December 31, 20X2, Green Tower’s inventory included goods that it had purchased from Blue Loft for $58,500. The intercompany profit on these goods was $15,600. All these goods were sold to third parties in 20X3.
• During 20X3, Green Tower purchased goods from Blue Loft for $195,000. Blue Loft earned a gross profit of $65,000 on this sale. At December 31, 20X3, Green Tower still had 40% of these goods in its inventory.
• During 20X3, Green Tower sold goods to Blue Loft for $507,000. Green Tower earned a gross profit of $117,000 on this sale. At December 31, 20X3, Blue Loft still had 20% of these goods in its inventory.
• In December, 20X3, Blue Loft sold a tract of land to Green Tower for $923,000. Blue Loft had purchased the land 8 years ago for $650,000.
• At the time of Green Tower’s acquisition, Blue Loft’s equipment had a remaining estimated useful life of 3 years. Blue Loft uses the straight-line method of amortization, with no residual value.
Required:
Prepare the consolidated financial statements for 20X3 using the direct method.
Problem 3 (22 marks)
Cox Ltd. acquired 70% of the common shares of March Co. at the beginning of 20X7. At the acquisition date, March’s shareholders’ equity consisted of the following:
Common shares $720,000
Retained earnings 360,000
The only acquisition differential pertained to goodwill.
Cox’s “Investment in March” general ledger account is as follows:
1/2/X7 Cost $ 781,200 12/31/X7 Dividends $33,600
12/31/X7 Investment Income 62,160 12/31/X8 Dividends 42,000
12/31/X8 Investment Income 76,440 12/31/X9 Dividends 50,400
12/31/X9 Investment income 94,080
Balance $ 887,880
March usually declares half of its profits as dividends.
Cox uses the entity theory method to consolidate its subsidiary.
Required:
a) Calculate the total amount of dividends declared by March for 20X7. (1 mark)
b) Calculate March’s profit for 20X8. (2 marks)
c) Calculate the non-controlling interest amounts for Cox’s 20X9
i. consolidated income statement, and (3 marks)
ii. consolidated balance sheet. (3 marks)
d) Calculate the amount of goodwill that should appear on Cox’s 20X9 consolidated balance sheet. (13 marks)