Assignment 1
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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 30th 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.
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