On January 1^st. 2017, X Company bought 80% of the outstanding common shares of the Y Company for $140,000 cash. On that date, Y Company had $50,000 of common shares outstanding and $60,000 retained earnings. On this date, the book values of each of Y’s identifiable assets and liabilities were equal to their fair values except for the following:-

Book Value…………Fair Value

Inventory…………………………………..$60,000………………..$70,000

Patent………………………………………..$20,000………………..$40,000

The patent had an estimated remaining useful life of 5 years.

Goodwill arising from the purchase was tested annually for impairments. In 2018, $6,000 of goodwill impairment and in 2019 $6,000. In 2021, $2,400 impairment occurred.

The following are the separate entity financial statements of the X & Y Companies at December 31^st. 2021:-

X & Y

Balance Sheets

December 31^st.2021

Assets: X……………….Y………

Cash…………………………………………...........$160,000……….$20,000

Accounts receivable………………………………….220,000………180,000

Inventory……………………………………………….600,000………240,000

Investment in Y……………………………………… 140,000………….0………

Equipment(net)……………………………………… 480,000………..370,000

Patent……………………………………………………..0……………. 4,000

TOTAL ASSETS:…………………………………....$1,600,000……..$814,000

Liabilities & Owners’ equity:-

Accounts payable……………………………………$ 500,000……...$490,000

Future income Taxes………………………………… 160,000……… 144,000

Common Shares………………………………………. 340,000……….. 50,000

Retained Earnings……………………………………… 600,000………130,000

TOTAL LIABILITIES & OWNERS’ EQUITY………..$ 1,600,000…….$814,000

X&Y

Statement of Income and Retained Earnings

Year ended December 31^st. 2021

X……………..…….Y…………

Sales……………………………………………$1,800,000………..$ 720,000

Cost of Goods Sold…………………………...( 680,000)………….(480,000)

Gross Margin………………………………....... 1,120,000………… 240,000

Amortization expense……………………………..(60,000)………… (50,000)

Other expenses……………………………………(360,000)…………(110,000)

Income tax expense………………………………(240,000)…………..(32,000)

Net Income………………………………………… 460,000…………... 48,000

Retained Earnings, January 1^st.2021…………… 140,000…………… 82,000

Retained Earnings, December 31^st. 2021………$600,000…………..$130,000

Additional Information:-

i. On July 1^st. 2018, X sold Y a piece of equipment with a net book value of $30,000 for cash consideration of $42,000. This equipment had a remaining useful life of 12 years and both companies use straight-line amortization.

ii. During 2020, Y sold inventory to X for $72,000. X’s ending inventory at December 31^st. 2020 included $9,100 of goods acquired from Y. Similarly during 2021, Y sold $130,000 of inventory to Y. Of these goods, 20% remained in X’s inventory at the end of December 31^st. 2021.Y sells its inventories to X at a mark up of 30% on cost.

iii. During 2020, X sold goods to Y from its inventory for $50,000 and in 2021 X sold to Y $60,000. All goods sold by X have a gross profit margin of 30% on the selling price. In 2020, $10,000 of the goods from X remained in Y’s inventory and in 2021, 40% of the goods bought from X remained in Y’s ending inventory.

iii. Neither Company has ever paid dividends.

iv. Both companies pay taxes at the rate of 40%.

Required:-

i. Calculate the consolidated net income for the year 2021(8 marks).

ii. Prepare the eliminating entry(ies) at acquisition(4 marks).

iii. Calculate the following balances as they would appear on the consolidated income statement for the year ending December 31^st. 2021-

a. Cost of Goods sold(3.5 marks).

b. Amortization expense(1.5 marks).

c. Income tax expenses(3 marks).

d. Non-controlling interest(1 mark).

iv. Calculate the following balances as they would appear on the consolidated balance sheet on December 31^st.. 2021:-

a. Inventory

b. Equipment, net

c. Future income taxes

d. Patent

e. Retained earnings.

v. Before an investor can present consolidated financial statements certain criteria must be present. List four of those criteria.

Answer rating: 100% (QA)

i Consolidated net income for 2021 is 588800 Workings Sales X Company 1800000 Y Company 720000 Total sales 2520000 Cost of goods sold X Company 1344000 Y Company 576000 Total cost of goods sold 192000... View the full answer