Assignment 1

Assignment 1

This
assignment should be completed after Chapter 5. It contributes 5% toward your
final grade. Remember to show all your work as partial marks may be awarded.

Question
1 (15
marks)

On January 2, 2013, Potter Ltd. purchased 40% ontiago Ltd. for $900,000.
At the acquisition date, Santiago’s balance sheet showed total shareholders’
equity of $1,500,000. Any acquisition differential is to be allocated to
Santiago’s equipment. At the acquisition date, the equipment had a remaining
useful life of 10 years. For the past 5 years, Santiago has paid annual
dividends of $50,000 and will continue to do so in the future.

The following information has been extracted from Santiago’s income
statement:

2014 2013

Net
income (loss) before extraordinary items $
(90,000) $ 450,000

Extraordinary
gain (net of tax) __-___ 150,000

Net
income (loss) $
(90,000) $
600,000

Required:

Assume that Potter has significant influence. Prepare Potter’s journal
entries related to its investment in Santiago for 2013 and 2014.

Question 2 (25
marks)

On September 1, 2014, Sunshine Ltd. acquired all the assets (with the
exception of cash) and liabilities of Moonbeam Ltd. Under the terms of
acquisition, Moonbeam shareholders received 3 Class A Sunshine Ltd. shares plus
$2.00 cash for every four shares of Moonbeam. At the acquisition date,
Sunshine’s Class A shares were valued at $2.50 per share. Sunshine had agreed
to cover Moonbeam’s estimated liquidation costs of $10,000. The $1,500 of cash
in Moonbeam’s bank at the acquisition date will go towards paying these costs. The
statements of financial position at the acquisition date are as follows:

Sunshine Moonbeam Ltd.

Ltd. Cost FMV

Cash $30,000 $
1,500 $ 1,500

Accounts
receivable
52,500 28,500 26,250

Inventory 78,000 39,750 48,000

Property
and equipment (net) 449,250
224,250 248,250

Kucey
Ltd. bonds (investment) _67,500 _27,000 28,500

677,250 321,000

Accounts
payable 117,000
114,000 114,000

Loan
payable ___–___
_60,000 60,000

117,000
174,000

Share
capital issued at $1 450,000
120,000

Retained
earnings 110,250
_27,000

560,250 147,000

$ 677,250 $ 321,000

Items not reflected in Moonbeam’s statement of financial position:

·
Contingent liability related to a loan guaranteewas
reported in the notes to the financial statements and has a fair value of
$2,000.

·
Moonbeam had expensed $15,000 in research and development
costs in the past year. At the acquisition date, Sunshine has determined that
the value of the research in progress is $3,000.

Sunshine’s statement of financial position does not include $5,000 in
fees for valuation and accounting advice related to the acquisition of
Moonbeam. Sunshine expects to pay these fees shortly.

Required:

a)
Prepare the acquisition analysis and calculate the
goodwill.

b)
Prepare all the journal entries in Sunshine’s books
to record the acquisition of Moonbeam.

c)
Prepare Sunshine’s statement of financial position
immediately following the acquisition.

Question 3 (40
marks)

On May 1, 2013, Peat Co. purchased all of Sorbet Ltd.’s issued common
shares for $630,000. At the acquisition date, Sorbet’s financial statements
included the following balances:

Share capital $400,000

Retained earnings 210,000

Goodwill
10,000

At the acquisition date, Sorbet’s identifiable assets and liabilities were
equal to their fair values, except in the case of inventory that had a book
value of $80,000 and a fair value of $86,000, and equipment that had a book
value of $360,000 and a fair value of $370,000. The equipment was originally
purchased for $480,000. At the acquisition date, the equipment had a remaining
useful life of 5 years and was amortized using the straight-line method. All
the inventory that Sorbet had on hand at the acquisition date was sold by
October 2013. Sorbet’s goodwill has not shown indications of impairment. Both
Peat and Sorbet have April 30^th year-ends and did not have any
intercompany sales with each other.

The financial statements for Peat and Sorbet at April 30, 2015 are
presented on the following pages.

Statement of
Financial Position

April 30, 2015

Peat
Co. Sorbet Ltd.

Assets:

Current
assets:

Cash $ 52,000 $
161,600

Accounts
receivable 100,000
80,000

Inventory 120,000 170,000

272,000
411,600

Non-current
assets:

Equipment,
net 558,000
368,000

Furniture
and fixtures, net 51,000 51,600

Investment
in Sorbet Ltd. 630,000 –

Goodwill ___–___ 10,000

1,239,000 429,600

Total
assets $ 1,511,000 $ 841,200

Liabilities
and shareholders’ equity:

Current
liabilities:

Accounts
payable $
69,000 $ 19,600

Non-current
liabilities:

Loan
payable
22,000 32,000

Total
liabilities 91,000 51,600

Shareholders’
equity:

Share
capital 1,000,000 400,000

Retained
earnings 420,000 389,600

1,420,000 789,600

Total
liabilities and shareholders’ equity $ 1,511,000 $
841,200

Condensed Statement
of Income

For the year ended
April 30, 2015

Peat
Co. Sorbet Ltd.

Sales $ 250,000 $ 180,000

Expenses 170,000 130,000

Net
income $
80,000 $ 50,000

Statement of Changes
in Equity

For the year ended
April 30, 2015

Peat
Co. Sorbet Ltd.

Share
capital $ 1,000,000 $ 400,000

Retained
earnings, May 1, 2014 340,000
339.600

Net
income 80,000 50,000

Retained
earnings, April 30, 2015 420,000 389,600

Total
shareholders’ equity $ 1,420,000 $ 789,600

Required:

Prepare Peat’s consolidated financial statements for April 30, 2015. Ignore
income taxes.

Question 4 (20
marks)

On June 30, 2014, Pewter Ltd. gave 28,000 shares to Sterling Co. in
exchange for 70% of Sterling’s outstanding shares. At the time of the exchange,
Pewter’s shares had a fair value of $22.50 per share. The post-acquisition
statements of financial position and Sterling’s fair values are shown below.

Statement of
Financial Position

As of June 30, 2014

Sterling Co.______

Pewter
Ltd. Book value Fair Value

Assets:

Current
assets:

Cash $
750,000 $ 37,500 $
37,500

Accounts
receivable 1,500,000
112,500 112,500

Inventory 150,000 37,500 37,500

2,400,000 187,500

Non-current
assets:

Land 750,000 225,000 300,000

Equipment 2,250,000 375,000
412,500

Accumulated
amortization (900,000) (112,500)

Investment
in Sterling 630,000 __ –___

2,730,000 487,500

Total assets $ 5,130,000 $ 675,000

Liabilities
and shareholders’ equity:

Current
liabilities:

Accounts
payable $
750,000 $ 75,000 75,000

Loan
payable 300,000
_____

1,050,000 75,000

Shareholders’
equity:

Common
shares 2,580,000 150,000

Retained
earnings 1,500,000450,000

4,080,000 600,000

Total
liabilities and shareholders’ equity$ 5,130,000
$ 675,000

Required:

a) Calculate Pewter’s consolidated goodwill.

b) Prepare Pewter’s consolidated statement of
financial position at
June 30, 2014 using the entity theory method of consolidation.