Solve the given Questions:
Question 1
On January 1, 2013, AA Inc. purchased 80% of the shares of BB Inc. for $4,000,000. On that date, the carrying value of BB's identifiable net assets was $4,080,000. The carrying value of BB's identifiable net assets was equal to their fair values except:
Book value Fair value
Inventory 2,000,000 2,119,000
Trademarks 0 138,000
Trademarks should be amortized over 6 years
At acquisition, BB's retained earnings were $1,080,000. During 2015, a goodwill impairment loss of $120,000 occurred. During 2016, a goodwill impairment loss of $200,000 occurred.
AA and BB
Statement of Income and retained Earnings
Year Ended December 31, 2016
AA and BB
|
AA
|
BB
|
|
Sales
|
12 264 000
|
7 382 000
|
|
Cost of goods sold
|
7 859 000
|
5 159 000
|
|
Gross Profit
|
4 405 000
|
2 223 000
|
|
Other Revenue
|
256 000
|
|
|
Depreciation and amortization expense
|
531 000
|
350 000
|
|
Interest expense
|
212 000
|
152 000
|
|
Other expenses
|
793 000
|
356 000
|
|
Income tax expense
|
1 250 000
|
546 000
|
|
Net income
|
1 875 000
|
819 000
|
|
|
|
|
Retained earnings, beginning of year
|
2 152 000
|
1 300 000
|
|
Net income
|
1 875 000
|
819 000
|
|
Dividends
|
625 000
|
320 000
|
|
Retained earnings, end of year
|
3 402 000
|
1 799 000
|
Balance Sheet
December 31, 2016
|
AA
|
BB
|
|
Assets
|
|
Cash
|
516 000
|
116 000
|
|
Accounts Receivable
|
1 000 000
|
1 080 000
|
|
Inventory
|
4 124 000
|
2 850 000
|
|
Investment in BB
|
4 000 000
|
|
|
Property, plant, and equipment
|
5 906 000
|
5 756 000
|
|
|
15 546 000
|
9 802 000
|
|
Liabilities and shareholder's equity
|
|
Accounts payable
|
2 844 000
|
1 203 000
|
|
Long term liabilities
|
5 300 000
|
3 800 000
|
|
Common shares
|
4 000 000
|
3 000 000
|
|
Retained earnings
|
3 402 000
|
1 799 000
|
|
|
15 546 000
|
9 802 000
|
Other Information:
1. BB sold inventory to AA during 2015 for $900,000. On December 31, 2015, $300,000 of the goods were unsold. During 2016, BB sold goods to AA for $1,000,000 and 60% remained unsold at year end. BB sells at a gross profit rate of 30%. On December 31, 2016, AA owed BB $300,000 for inventory purchases.
2. Also during 2016, AA sold $200,000 of inventory to BB at a 40% gross profit rate. At year end, 25% of these goods remained unsold.
3. On December 31, 2014, AA sold equipment to BB for $880,000. At that time, the book value of the equipment was $400,000. It should be depreciated over the next 8 years with no residual value.
4. During 2014, BB sold land to AA for $490,000. The original cost of the land was $350,000.
5. The tax rate for both firms is 40%, and AA uses the FVE and cost methods to account for its investment in BB. Note BB paid dividends.
Required:
1. Prepare all tables necessary in order to prepare a consolidated income statement and calculate selected balance sheet amounts. The following tables are suggested, but not required:
a. Calculation 2a, goodwill, on date of acquisition
b. Calculation 2b, ADA and goodwill impairment table up to and including 2016
c. Calculation 3, unrealized profit in intercompany inventory sales
d. Calculation 4, unrealized profit in intercompany sale of depreciable assets
e. Calculation 5, consolidated net income
f. Calculation 7, NCI - Balance Sheet
2. Prepare a Consolidated Income Statement for 2016.
3. Calculate the following consolidated account balances on December 31, 2016. Show all your calculations for possible part marks.
a. Accounts receivable
b. Plant and equipment, net
c. Inventory
d. Deferred income tax
e. NCI Balance Sheet