On December 31, Year 2, Palm Inc. purchased 80% of the outstanding ordinary shares of Storm Company for $310,000. At that date, Storm had ordinary shares of $200,000 and retained earnings of $60,000. In negotiating the purchase price, it was agreed that the assets on Storm's statement of financial position were fairly valued except for plant assets, which had a $40,000 excess of fair value over carrying amount. It was also agreed that Storm had unrecognized intangible assets consisting of trademarks that had an estimated value of $24,000. The plant assets had a remaining useful life of 8 years at the acquisition date and the trademarks would be amortized over a 12-year period. Any goodwill arising from this business combination would be tested periodically for impairment. Palm accounts for its investment using the cost method.
Additional Information
• At December 31, Year 5, an impairment test of Storm's goodwill revealed the following: Fair value less disposal costs based on recent offer from prospective purchaser $46,000 Value in use based on undiscounted future net cash flows 65,000 Value in use based on discounted future net cash flows using a discount rate of
6%, which is Storm's incremental borrowing rate ...... 50,000
3%, which is the risk-free rate on government bonds ..... 55,000
An impairment test indicated that the trademarks had a recoverable amount of $13,750. The impairment loss on these assets occurred entirely in Year 6.
• On December 26, Year 6, Palm declared dividends of $36,000, while Storm declared dividends of $20,000.
• Amortization expense is reported in selling expenses, while impairment losses are reported in other expenses.
Financial statements for Palm and Storm for the year ended December 31, Year 6, were as follows:
(a) Prepare consolidated financial statements.
(b) If none of the acquisition differential had been allocated to trademarks at the date of acquisition, how would this affect
(i) The return on total shareholders' equity for Year 6?
(ii) The debt-to-equity ratio at the end of Year 6?

  • CreatedJune 08, 2015
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