Phoenix Inc. purchased 75% of the voting shares of Sky Inc. for $525,000 on December 31,...

  

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Phoenix Inc. purchased 75% of the voting shares of Sky Inc. for $525,000 on December 31, 2017. On that date, Sky Inc.'s Common Stock and Retained Earnings had book values of $200,000 and $100,000, respectively. Sky's fair values approximated its carrying values with the following exceptions: • Inventory had a fair value $30,000 higher than carrying value, Equipment had a fair value $150,000 higher than carrying value (8 years remaining), • Patents that meet the intangible asset recognition criteria of $125,000 were identified. The patents have a legal life of 10 years and are expected to become obsolete in 5 years. The Financial Statements of both companies for the Year ended December 31, 2020 are shown below: Income Statement & Statement of Retained Earnings: Sales Other Revenues Cost of Goods Sold Depreciation Expense Other Expenses Income Tax Expense Net Income Retained Earnings, Dec 31, 2019 Dividends Retained Earnings, Dec 31, 2020 Balance Sheets: Cash Accounts Receivable Inventory Investment in Sky Inc Land Equipment - Net Current Liabilities Common Shares Retained Earnings Phoenix $500,000 100,000 (400,000) (20,000) (60,000) (48,000) 72,000 200,000 (22,000) 250,000 $150,000 325,000 200,000 525,000 40,000 360,000 1,600,000 $850,000 500,000 250,000 1,600,000 Sky $400,000 60,000 (320,000) (10,000) (30,000) (40,000) 60,000 240,000 (30,000) 270,000 $120,000 160,000 180,000 240,000 700,000 $230,000 200,000 270,000 700,000 Other Information: . During 2019, Sky sold $90,000 worth of inventory to Phoenix, 50% of which was sold to outsiders during the year. During 2020, Sky sold inventory to Phoenix for $120,000. 80% of this inventory was resold by Phoenix to outside parties in 2020. In 2019, Sky sold a lot of Land to Phoenix for $40,000. The land was recorded at cost of $24,000 on Sky's book prior to the sale. Phoenix has not yet sold the land. All intercompany inventory sales as well as sales to outsiders are priced to generate a gross profit of 20% of sales. The effective tax rate for both companies is 40%. On January 1, 2019, Sky sold equipment to Phoenix at a gain of $100,000. The remaining useful life of the equipment is 5 years. Required - (Please use the Fair Value Enterprise Method (Entity Method) for the below) A) Prepare the purchase price allocation. (3.5 Points) B) Prepare the amortization of the acquisition differential schedule as at December 31, 2020. Please show movements from December 31 2017 to December 31, 2020. (3 Points) C) What is the unrealized equipment gain as at December 31, 2019 and December 31, 2020? What is the realized equipment gain for the year ended December 31, 2020? (2.5 Points) For parts D-G, calculate the balances as they would appear on the consolidated income statement for the year ended December 31, 2020: D) Other revenues (1 Point) E) Cost of goods sold (4 Points) F) Depreciation and amortization expense (3 Points) G) Income tax expense (3 Points) For parts H-I, calculate the balances as they would appear on the consolidated balance sheet as at December 31, 2020: H) Net Equipment (2 Points) 1) Non-Controlling Interest (5.5 Points) J) What three criteria must be met for the patents to be recorded on the consolidated financial statements as at the date of the acquisition? Explain each criteria in no more than 1-2 sentences (2.5 points) Phoenix Inc. purchased 75% of the voting shares of Sky Inc. for $525,000 on December 31, 2017. On that date, Sky Inc.'s Common Stock and Retained Earnings had book values of $200,000 and $100,000, respectively. Sky's fair values approximated its carrying values with the following exceptions: • Inventory had a fair value $30,000 higher than carrying value, Equipment had a fair value $150,000 higher than carrying value (8 years remaining), • Patents that meet the intangible asset recognition criteria of $125,000 were identified. The patents have a legal life of 10 years and are expected to become obsolete in 5 years. The Financial Statements of both companies for the Year ended December 31, 2020 are shown below: Income Statement & Statement of Retained Earnings: Sales Other Revenues Cost of Goods Sold Depreciation Expense Other Expenses Income Tax Expense Net Income Retained Earnings, Dec 31, 2019 Dividends Retained Earnings, Dec 31, 2020 Balance Sheets: Cash Accounts Receivable Inventory Investment in Sky Inc Land Equipment - Net Current Liabilities Common Shares Retained Earnings Phoenix $500,000 100,000 (400,000) (20,000) (60,000) (48,000) 72,000 200,000 (22,000) 250,000 $150,000 325,000 200,000 525,000 40,000 360,000 1,600,000 $850,000 500,000 250,000 1,600,000 Sky $400,000 60,000 (320,000) (10,000) (30,000) (40,000) 60,000 240,000 (30,000) 270,000 $120,000 160,000 180,000 240,000 700,000 $230,000 200,000 270,000 700,000 Other Information: . During 2019, Sky sold $90,000 worth of inventory to Phoenix, 50% of which was sold to outsiders during the year. During 2020, Sky sold inventory to Phoenix for $120,000. 80% of this inventory was resold by Phoenix to outside parties in 2020. In 2019, Sky sold a lot of Land to Phoenix for $40,000. The land was recorded at cost of $24,000 on Sky's book prior to the sale. Phoenix has not yet sold the land. All intercompany inventory sales as well as sales to outsiders are priced to generate a gross profit of 20% of sales. The effective tax rate for both companies is 40%. On January 1, 2019, Sky sold equipment to Phoenix at a gain of $100,000. The remaining useful life of the equipment is 5 years. Required - (Please use the Fair Value Enterprise Method (Entity Method) for the below) A) Prepare the purchase price allocation. (3.5 Points) B) Prepare the amortization of the acquisition differential schedule as at December 31, 2020. Please show movements from December 31 2017 to December 31, 2020. (3 Points) C) What is the unrealized equipment gain as at December 31, 2019 and December 31, 2020? What is the realized equipment gain for the year ended December 31, 2020? (2.5 Points) For parts D-G, calculate the balances as they would appear on the consolidated income statement for the year ended December 31, 2020: D) Other revenues (1 Point) E) Cost of goods sold (4 Points) F) Depreciation and amortization expense (3 Points) G) Income tax expense (3 Points) For parts H-I, calculate the balances as they would appear on the consolidated balance sheet as at December 31, 2020: H) Net Equipment (2 Points) 1) Non-Controlling Interest (5.5 Points) J) What three criteria must be met for the patents to be recorded on the consolidated financial statements as at the date of the acquisition? Explain each criteria in no more than 1-2 sentences (2.5 points)

Answer rating: 100% (QA)

Fair value measurment given under Journal Entries Year 4 Jan01 Trading Securities Cash Entry ... View the full answer