Assignment
Question
The financial statement of Pa and Son as at December 31, Year 6 are shown below:
Balance sheet
At December 31, year 6
Assets Pa Son
Cash $ 14,000 $ 16,800
Receivables 25,000 21,000
Inventory 45,000 50,000
Land 20,000 10,000
Property, plant and equipment 175,000 250,000
Accumulated depreciation 35,000 40,000
Other assets 59,600 --
Investment in Son 170,000 --
473,600 307,800
liabilities and share holders' equity
current liabilities 36,400 37,800
long-term liabilities ----- 102,500
common shares 350,000 125,000
retained earnings 87,200 42,500
$ 473,600 $307,800
statement of retained earnings
For the year ended December 31, year 6
PaSon
Retained earnings, Jan 1 77,600 25,000
Net Income 34,600 29,500
Dividends 25,000 12,000
Retained earnings 87,200 42,500
Income Statement
For the year ended December 31, year 6
on
Sales revenue 430,200 270,000
Other income 42,400 ------
Cost of goods sold 350,000 173,000
Depreciation & amortization expense 18,000 28,000
General and administration expense 57,000 19,000
Interest expense ---- 9,500
Income tax expense 13,000 11,000
Net income 34,600 29,500
1. Pa acquired 80% of Son's common stock on January 1, year 1 for $170,000. At that date, Son's reported a retained earnings balance of $20,000 and common shares $125,000. On that date, Son's net assets were equal to fair market value with the exception of the following:
Carrying Value Fair Value
Inventory $50,000 $60,000
Equipment (10 years useful life remaining) $260,000 $240,000
Land $10,000 $12,000
2. Annual impairment tests of goodwill result in losses of $8,000 in year 3 and $2,500 in year 6.
3. Pa uses the cost method.
4. Assume 40% corporate tax rate.
5. Son's sales during year 6 include $70,000 of sales to Pa. Goods purchased from Son and included in Pa's inventories were $50,000 at the end of year 5 and $30,000 at the end of year 6. Son's gross profit margin to Pa is 30%.
6. During year 6, Pa sold inventory that it had purchased for $80,000 to Son for $100,000. 30% of the inventory was resold by Son by December 31, year 6.
7. On April 1, year 6, PA sold machinery to Son for $40,000. The carrying value of the machinery at that date of sale was $48,000. The remaining useful life of the machinery on that date was 4 years.
8. On January, year 4, Son sold a building to Pa for $60,000. Son had Purchased the building on January 1, year 1 for $80,000 and it had an estimated 8 year life on that date with no salvage value.
9. On May 1, year 6, Son borrowed $10,000 from Pa. the one-year note had interest rate of 6%. Both the principal and interest was payable at maturity.
Required
1. a) Prepare the calculation and allocation of AD schedule and the AD amortization and goodwill impairment schedule.
b) Prepare the intercompany profits, gains and losses schedule.
c) Calculate the consolidated net income for year 6
d) Calculate the consolidated retained earnings at Jan. 1, Year 6.
e) Prepare in good form the following for year 6:
- Consolidated income statement
- Consolidated retained earnings statement
- Consolidated balance sheet
2. Prepare the paper eliminating journal entries for the inter-company sale of the machinery in Year 6.