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Chapter 6 Problems

By Adam Gonzales,2014-06-27 23:03
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Chapter 6 Problems ...

Chapter 6 Problems

    Problem 1

(a)

    Net income Pill Year 1 (cost method) 25,000

    Less: Dividends from Sill (85% ? 9,000) 7,650

     17,350

    Net income of Sill Year 1 40,000

    Less: Goodwill impairment loss 1,500

     38,500

     85% 32,725 Consolidated net income Year 1 50,075

(b)

    Noncontrolling interest Year 1 [15% ? (40,000 1,500)] 5,775

(c)

    Investment in Sill Dec. 31, Year 1 (cost method) 238,000

    Income from Sill 32,725

     270,725

    Less: Dividends from Sill 7,650 Investment in Sill Dec. 31, Year 1 - equity method 263,075

Problem 2

    Cost of 75% investment 600,000 Implied cost of 100% investment 800,000

    Small Common stock 400,000

    Retained earnings 100,000

     500,000 Purchase discrepancy Jan. 1, Year 1 300,000

    Allocated:

    Inventory 40,000

    Patents (70,000) (30,000) Balance goodwill 330,000

     Balance Balance

     Jan. 1 Amortization Dec. 31

     Year 1 Yr 1 & 2 Year 3 Year 3 Inventory 40,000 40,000

    Patents (70,000) (28,000) (14,000) (28,000)

    Goodwill 330,000 0 19,300 310,700

     300,000 12,000 5,300 282,700

PART A

     Year 1 Year 2 Year 3

    Investment in Small 600,000

     Cash 600,000

    Cash 18,750 7,500 30,000

     Dividend income 18,750 7,500 30,000

PART B

    (a) Goodwill 310,700

    (b) Small’s common stock 400,000

     Small’s retained earnings (100+80-25-35-10+100-40) 170,000

     570,000

     Unamortized purchase discrepancy 282,700

     852,700

     NCI’s share (25%) 213,175

    (c) Large’s retained earnings 500,000

     Small’s retained earnings (100+80-25-35-10) 110,000

     Small’s retained earnings, date of acquisition 100,000

     Change since acquisition 10,000

     Less: cumulative amortization of purchase discrepancy 12,000

     (2,000)

     Large’s share (75%) (1,500)

     Consolidated retained earnings 498,500 (d) Large’s net income 200,000

     Less: dividends from Small (40,000 x75%) (30,000)

     170,000

     Small’s net income 100,000

     Less: amortization of purchase discrepancy 5,300

     94,700

     Large’s share (75%) 71,025

     Consolidated net income 241,025 (e) NCI on income statement (94,700 x 25%) 23,675

Problem 3

    Cost of 70% investment 84,000 Implied cost of 100% investment 120,000

    Petite Common stock 35,000

    Retained earnings 25,000

     60,000 Purchase discrepancy Jan. 1, Year 2 60,000

    Allocated:

    Inventory 10,000

    Equipment 20,000 30,000 Balance - goodwill 30,000

     Balance Balance

     Jan. 1 Amortization Dec. 31

     Year 2 Yrs 2 to 5 Year 6 Year 6

Inventory 10,000 10,000

    Equipment 20,000 8,000 2,000 10,000

    Goodwill 30,000 0 2,000 28,000

     60,000 18,000 4,000 38,000

(a)

    Inventory (150,000 + 80,000) 230,000

    Equipment, net (326,000 + 160,000 + 10,000) 496,000

    Goodwill 28,000

    Noncontrolling interest on balance sheet

     Petite’s common stock 35,000

     Petite’s retained earnings 50,000

     85,000

     Unamortized purchase discrepancy 38,000

     123,000

     NCI’s share (30%) 36,900

Gros’s retained earnings 270,000

    Petite’s retained earnings 50,000

    Petite’s retained earnings, date of acquisition 25,000 Change since acquisition 25,000

    Less: cumulative amortization of purchase discrepancy 22,000

     3,000

    Gros’s share (70%) 2,100

     Consolidated retained earnings 272,100 Cost of goods sold (500,000 + 450,000) 950,000

    Amortization expense (35,000 + 20,000 + 2,000) 57,000

    Noncontrolling interest on income statement

     Petite’s net income 48,000

     Less: amortization of purchase discrepancy 4,000

     44,000

     NCI’s share (30%) 13,200

Net income

     Gros’s net income 90,000

     Less: dividends from Petite (10,000 x 70%) (7,000)

     83,000

     Petite’s net income 48,000

     Less: amortization of purchase discrepancy 4,000

     44,000

     Gros’s share (70%) 30,800

     Consolidated net income 113,800 Dividends paid 30,000 (b) If goodwill at December 31, Year 6 was $8,000 rather than $28,000, then:

    1. Consolidated net income would decrease by $14,000 (70% x (28,000 8,000))

    2. Consolidated retained earnings would decrease by $14,000 (70% x (28,000 8,000))

    3. Noncontrolling interest in net income would decrease by $6,000 (30% x (28,000 8,000))

Problem 4

(a)

Noncontrolling interest 280/(600+800) = 20%

    Therefore Corner owns 80% of Brook.

(b)

Net income of Brook Year 4 140,000

     80%

     112,000

    Net loss of Corner Year 4 60,000 Consolidated net income Year 4 52,000

(c)

Consolidated retained earnings Dec. 31, Year 4 180,000

    Consolidated net income Year 4 52,000 Corner's retained earnings Dec. 31, Year 3 (equity) 128,000

(d)

640,000 / 80% is shareholders' equity of Brook 800,000

    Common stock Brook 600,000 Retained earnings Brook date of acquisition 200,000

Problem 5

    Cost of 85% investment 646,000 Implied cost of 100% investment 760,000

    Silk Common stock 500,000

    Retained earnings 100,000

     600,000 Purchase discrepancy Dec. 31, Year 1 160,000

    Allocated:

    Inventory 70,000 Balance patents 90,000

     Balance Balance

     Dec. 31 Amortization Dec. 31

     Year 1 Year 2 Year 3 Year 3 Inventory 70,000 70,000

    Patents 90,000 9,000 9,000 72,000

     160,000 79,000 9,000 72,000

(a)

    Noncontrolling interest in net income

Year 2 15% ? (30,000 79,000) - 7,350

    Year 3 15% ? (52,000 9,000) 6,450

(b)

    Year 2 Year 3 Net income (loss) Pen 28,000 (45,000)

    Dividends from Silk

    Year 2 0

    Year 3 (85% ? 15,000)

     (12,750)

     28,000 (57,750)

    Share of Silk net income

    85% ? (30,000 79,000) (41,650)

    85% ? (52,000 9,000) 36,550 Consolidated net income (loss) (13,650) (21,200)

(c)

    Retained earnings Pen Dec. 31, Year 3 (cost method) 91,000

    Retained earnings Silk Dec. 31, Year 3

    (100,000 + 30,000 + 52,000 15,000) 167,000

    Acquisition retained earnings 100,000 Increase since acquisition 67,000

    Less: purch. discrep. amort. to date (79,000 + 9,000) 88,000

     - 21,000

     85% - 17,850 Consolidated retained earnings Dec. 31, Year 3 73,150

(d)

    Silk Common stock 500,000

    Retained earnings Dec. 31, Year 3 167,000

     667,000

    Unamortized purchase discrepancy 72,000

     739,000

     15% Noncontrolling interest Dec. 31, Year 3 110,850

(e)

    Cost of investment 646,000

    Retained earnings Silk Dec. 31, Year 3

    (100,000 + 30,000 + 52,000 15,000) 167,000

    Acquisition retained earnings 100,000 Increase since acquisition 67,000

    Less: purch. discrep. amort. to date (79,000 + 9,000) 88,000

     - 21,000

     85% - 17,850 Invest. account equity method as at Dec. 31, Year 3 628,150

(f)

    See amortization schedule above.

    Alternative calculation:

    Invest. account equity Dec. 31, Year 3 628,150 Implied value of 100% ( 628,150 / 85%) 739,000

    Silk Common stock 500,000

    Retained earnings 167,000

     667,000 Balance unamortized purch. discrep. Patents 72,000

Prob

    lem

    6

    Cost of 80% of Lee 70,000 Implied value of 100% 87,500

    Book value of Lee Common stock 25,000

     Retained earnings 30,000

     55,000 Purchase discrepancy 32,500

    Allocated: Fv Bv

    Inventory 5,000

    Patent 10,000 15,000 Goodwill 17,500

     Bal Amortization Bal

     Jan. 1/Yr3 To Dec. 31/Yr5 Yr6 Dec.31/Yr6 Inventory 5,000 5,000

    Patent 10,000 6,000 2,000 2,000

    Goodwill 17,500 7,500 10,000

     32,500 11,000 9,500 12,000

     Calculation of Year 6 net income

    Net income Grant 230,000

    Net income Lee 23,000

    Less: Amortization of purchase discrepancy 9,500

     13,500

     80% 10,800

     240,800

     Grant Corporation

     Consolidated Income Statement

     Year ended December 31, Year 6

    Sales (900,000 + 360,000) 1,260,000

    Cost of goods sold (340,000 + 240,000) 580,000 Gross margin 680,000 Amortization expense (30,000 + 25,000 + 2,000) 57,000

    Goodwill impairment loss 7,500

    Other expenses (180,000 + 56,000) 236,000

    Income taxes (120,000 + 16,000) 136,000

     Total 436,500

Net income entity 243,500

    Noncontrolling interest [20% x 23,000 9,500)] 2,700 Net income 240,800

Calculation of consolidated retained earnings Jan.1, Year 6

    Retained earnings Grant 70,000

    Retained earnings Lee 42,000

    Retained earnings Lee, acquisition date 30,000 Increase 12,000

    Less: Purchase discrepancy amortization 11,000

     1,000

     80% 800

     70,800

     Grant Corporation

     Consolidated Retained Earnings Statement

     Year Ended December 31, Year 6

    Balance January 1 70,800

    Net income 240,800 Balance December 31 311,600

Proof

    Retained earnings Grant 300,000

    Retained earnings Lee 65,000

    Acquisition 30,000 Increase 35,000

    Less: Purchase discrep. amort. (11,000 + 9,500) 20,500

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