Question

On December 31, 19X9, Hari Company (Hari) purchased 70% of the outstanding common shares of Amin Limited (Amin) for $ 7,000. On that date, Amin’s shareholders’ equity consisted of common shares of $ 250 and retained earnings of $ 4,500. The financial statements for Hari and Amin for 20X5 were as follows:
Statements of Financial Position
December 31, 20X5


Other Information
1. In negotiating the purchase price at the date of acquisition, it was agreed that the fair values of all of Amin’s assets and liabilities were equal to their carrying values, except for the following:


2. Both companies use FIFO to account for their inventory and the straight- line method for amortizing their capital assets. Amin’s capital assets had a remaining useful life of ten years at the acquisition date. 3. Each year, goodwill is evaluated to determine if there has been permanent impairment. It was determined that goodwill on the consolidated statement of financial position should be reported at $ 1,100 on December 31, 20X4, and at $ 1,030 on December 31, 20X5. 4. During 20X5, inventory sales from Amin to Hari were $ 10,000. Hair’s inventories contained merchandise purchased from Amin for $ 2,000 on December 31, 20X4 and $ 2,500 at December 31, 20X5. Amin earns a gross margin of 40% on its intercompany sales.
5. On January 1, 20X1, Hari sold some equipment to Amin for $ 1,000 and recorded a gain of $ 200 before taxes. This equipment had a remaining useful life of eight years at the time of the purchase by Amin.
6. Hari charges $ 50 per month to Amin for consulting services.
7. Hari uses the cost method in accounting for its long- term investment. 8. Both companies pay taxes at the rate of 40%. Ignore future taxes when allocating and amortizing the purchase price.

Required
1. Prepare a consolidated statement of income for the year ended December 31, 20X5.
2. Calculate consolidated retained earnings at January 1, 20X5, and then prepare the retained earnings section of the consolidated statement of changes in equity for the year ended December 31, 20X5.
3. Explain how the historical cost principle supports the adjustments made on consolidation when there has been an intercompany sale of equipment.


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  • CreatedMarch 13, 2015
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