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This Study Resource Was: Award: 10.00 Points
This Study Resource Was: Award: 10.00 Points
Peach Ltd. acquired 80% of the common shares of Cherry Company on January 1, Year 4. On that date,
Cherry had common shares of $710,000 and retained earnings of $410,000.
The following is a summary of the changes in Peach’s investment account from January 1, Year 4, to
December 31, Year 6:
INVESTMENT IN CHERRY
January 1, Year 4 Cost $ 935,000
December 31, Year 4 Equity method income 68,300
Dividends (39,000)
December 31, Year 5 Equity method income 80,200
Dividends (46,000)
December 31, Year 6 Equity method income 94,900
Dividends (53,000)
Balance $ 1,040,400
Additional Information
• Dividends declared by Cherry each year were equal to 50% of Cherry’s reported profit each year.
• On January 1, Year 4, the carrying amounts of the identifiable net assets of Cherry were equal to fair
values.
• There was a goodwill impairment loss each year since the date of acquisition.
Required:
Calculate the following:
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(a) The amount of dividends declared by Cherry in Year 4
Cherry’s Year 4 dividends $ 48,750
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(b) The reported profit of Cherry for Year 5
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Year 5 reported profit of Cherry $ 115,000
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(c) The amount for noncontrolling interest that would appear in the Year 6 consolidated income statement
and statement of financial position
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Noncontrolling interest on consolidated income statement $ 23,725
Noncontrolling interest on consolidated statement of financial position $ 260,100
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(d) The amount of goodwill that would appear on the December 31, Year 6, consolidated statement of
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financial position
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Amount of goodwill on December 31, Year 6 consolidated statement of financial position $ 8,000
Explanation:
(a)
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Cherry’s Year 4 dividends were $48,750 ($39,000 / 80%)
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(b)
Cherry’s Year 5 dividends were $57,500 ($46,000 / 80%)
Therefore, the Year 5 reported profit of Cherry was $115,000 ($57,500 / 50%)
(c)
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Investment in Cherry at Dec. 31, Year 6 (80% interest) $ 1,040,400
Imputed value of 100% $ 1,300,500
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Noncontrolling interest on consolidated statement of financial position (20%) $ 260,100
Investment income for year 6 (80% share) $ 94,900
Imputed value of 100% 118,625
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Noncontrolling interest on consolidated income statement (20%) $ 23,725
(d)
Because the entire acquisition differential was recognized as goodwill, and because we know the equity
method balance in the investment account as at December 31, Year 6 we can use it to calculate goodwill on
that date as follows:
Investment account Dec. 31, Year 6 (equity) $ 1,040,400
Imputed value of 100% carrying amount of investment $ 1,300,500
Shareholders’ equity — Cherry
Balance, January 1, Year 4 $ 1,120,000
Less: Dividends for Years 4 to 6
($39,000 + $46,000 + $53,000) / 80% (172,500)
Plus: Profit for Years 4 to 6 (twice the dividends) 345,000
Balance, December 31, Year 6 1,292,500
Balance of unamortized acquisition differential — goodwill $ 8,000
https://www.coursehero.com/file/25292854/ACCT6010S53pdf/
References
Worksheet Learning Objective: 0503
Prepare consolidated financial
statements using the entity
theory subsequent to the date of
acquisition.
Learning Objective: 05 Learning Objective: 0505
02 Prepare schedules to Prepare journal entries and
allocate and amortize calculate balance in the
the acquisition investment account under the
differential on both an equity method.
annual and a cumulative
basis.
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https://www.coursehero.com/file/25292854/ACCT6010S53pdf/
7. Award: 10.00 points
On January 1, Year 4, Grant Corporation bought 8,000 (80%) of the outstanding common shares of Lee
Company for $70,000 cash. Lee’s shares were trading for $7 per share on the date of acquisition. On that
date, Lee had $25,000 of common shares outstanding and $30,000 retained earnings. Also on that date,
the carrying amount of each of Lee’s identifiable assets and liabilities was equal to its fair value except for
the following:
Carrying amount Fair value
Inventory $50,000 $55,000
Patent 10,000 20,000
The patent had an estimated useful life of five years at January 1, Year 4, and the entire inventory was
sold during Year 4. Grant uses the cost method to account for its investment.
Additional Information
• The recoverable amount for goodwill was determined to be $10,000 on December 31, Year 7. The
goodwill impairment loss occurred in Year 7.
• Grant’s accounts receivable contains $30,000 owing from Lee.
• Amortization expense is grouped with distribution expenses and impairment losses are grouped with
other expenses.
The following are the separateentity financial statements of Grant and Lee as at December 31, Year 7:
BALANCE SHEETS
At December 31, Year 7
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Grant Lee
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Assets
Cash $ 5,000 $ 18,000
Accounts receivable 185,000 82,000
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Inventory 310,000 100,000
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Investment in Lee 70,000 –
Equipment, net 230,000 205,000
Patent, net – 2,000
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$ 800,000 $ 407,000
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Liabilities and Shareholders’ Equity
Accounts payable $ 190,000 $ 195,000
Other accrued liabilities 60,000 50,000
Income taxes payable 80,000 72,000
Common shares 170,000 25,000
Retained earnings 300,000 65,000
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$ 800,000 $ 407,000
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INCOME STATEMENT
Year ended December 31, Year 7
Grant Lee
Sales $ 900,000 $ 360,000
Cost of goods sold (340,000) (240,000)
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Required:
(a) Calculate consolidated retained earnings at December 31, Year 7. (Input all values as positive
numbers.)
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Calculation of consolidated retained earnings – Dec 31, Year 7
Retained earnings – Grant $ 300,000
Retained earnings – Lee $ 65,000
Acquisition 30,000
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$ 1,119,000
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Explanation:
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Cost of 80% interest in Lee
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Grant
$70,000
NCI
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Fair value of NCI’s interest in Lee ($7 × 2,000 shares) $ 14,000
Carrying amount of Lee’s net assets = Carrying
amount of Lee’s shareholders’ equity
Common shares $ 25,000
Retained earnings 30,000
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$ 55,000
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Acquisition differential $26,000 $ 3,000
Allocated:
FV – CA
Inventory $ 5,000 4,000 1,000
Patent 10,000 8,000 2,000
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Bal Amortization Bal
To Dec. Dec.
Jan. 1/Yr4 Yr7
31/Yr6 31/Yr7
Inventory $ 5,000 $ 5,000
Patent 10,000 6,000 $ 2,000 $ 2,000
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(a)
Calculation of Year 7 net income attributable to Grant’s Shareholders
Net income Grant $ 230,000
Net income Lee $ 23,000
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Grant’s % interest 80%
18,400
Less: Grant’s share of amortization of acquisition
5,600
differential ($2,000 × 80% + $4,000)
12,800
$ 242,800
Acquisition differential amortization ($11,000 + $2,000) × 80% + $4,000 = –$14,400
Grant’s share of amortization of acquisition differential ($2,000 × 80% + $4,000) = $5,600
(b)
Sales ($900,000 + $360,000) = $1,260,000
Cost of goods sold ($340,000 + $240,000) = $580,000
Distribution expense ($30,000 + $25,000 + $2,000) = $57,000
Other expenses ($180,000 + $56,000 + $4,000) = $240,000
Income taxes ($120,000 + $16,000) = $136,000
Noncontrolling interest ([20% × ($23,000 – $2,000)]) = $4,200
https://www.coursehero.com/file/25292854/ACCT6010S53pdf/
Cash ($5,000 + $18,000) = $23,000