Question

On January 1, Year 1, the Vine Company purchased 60,000 of the 80,000 ordinary shares of the Devine Company for $80 per share. On that date, Devine had ordinary shares of $3,500,000, and retained earnings of $2,100,000. When acquired,
Devine had inventories with fair values $100,000 less than carrying amount, a parcel of land with a fair value $200,000 greater than the carrying amount, and equipment with a fair value $200,000 less than carrying amount. There were also internally generated patents with an estimated market value of $400,000 and a five-year remaining life. A long-term liability had a market value $100,000 greater than carrying amount; this liability was paid off December 31, Year 4. All other identifiable assets and liabilities of Devine had fair values equal to their carrying amounts. Devine’s accumulated depreciation on the plant and equipment was $500,000 at the date of acquisition.
At the acquisition date, the equipment had an expected remaining useful life of 10 years. The equipment and patents are used in manufacturing. Both companies use the straight-line method for all depreciation and amortization calculations and the FIFO inventory cost flow assumption. Assume a 40% income tax rate on all applicable items and that there were no impairment losses for goodwill. On September 1, Year 5, Devine sold a parcel of land to Vine and recorded a total non-operating gain of $400,000.
Sales of finished goods from Vine to Devine totaled $1,000,000 in Year 4 and $2,000,000 in Year 5. These sales were priced to provide a gross profit margin on selling price of 33 1/3% to the Vine Company. Devine’s December 31, Year 4, inventory contained $300,000 of these sales; December 31, Year 5, inventory contained $600,000.
Sales of finished goods from Devine to Vine were $800,000 in Year 4 and $1,200,000 in Year 5. These sales were priced to provide a gross profit margin on selling price of 40% to the Devine Company. Vine’s December 31, Year 4, inventory contained $100,000 of these sales; the December 31, Year 5, inventory contained $500,000.
Vine’s investment in Devine’s account is carried in accordance with the cost method and includes advances to Devine of $200,000.
There are no intercompany amounts other than those noted, except for the dividends of $500,000 (total amount) declared and paid by Devine.
Required:
(a) Show the allocation of the acquisition cost at acquisition and the related amortization schedule. Show and label all calculations.
(b) Prepare a consolidated income statement with expenses classified by function.
(c) Calculate consolidated retained earnings at December 31, Year 5.
(d) Prepare a consolidated statement of financial position for Vine Company at
December 31, Year 5.
(e) Assume that Devine’s shares were trading at $75 per share shortly before and after the date of acquisition, and that this data was used to value non-controlling interest at the date of acquisition. Calculate goodwill and non-controlling interest at December 31, Year 5.


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  • CreatedJune 08, 2015
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