Question 2 On January 1, 2016, Paganini Inc. bought 80% of Strauss Inc.'s 500,000 outstanding ordinary...

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Question 2 On January 1, 2016, Paganini Inc. bought 80% of Strauss Inc.'s 500,000 outstanding ordinary shares for $1.40 per share, the fair value of all of Strauss' ordinary shares. On this day, Strauss had ordinary shares of $400,000 and retained earnings of $250,000 on its statement of financial position. All assets and liabilities of Strauss were fairly valued on this date, except for the following items: Inventory: Equipment: Land Bonds payable Overvalued by $30,000 Overvalued by $48,000 (16 years useful life left) Undervalued by $100,000 See point 5 below Additional information: 1. Paganini is a public company and uses the cost method to account for its investment in Strauss. 2. Paganini charges Strauss $4,000 management fee per month. 3. Goodwill on acquisition was impaired by $35,000 and $10,000 in 2020 and 2022, respectively. 4. Paganini paid dividends of $37,000 and Strauss paid dividends of $43,000 during 2022. 5. On January 1, 2011, Strauss issued $100,000, 15-year bonds at par. The bonds have a coupon rate of 8.5% and pays interest annually. The market rate of interest on similar bonds on January 1, 2016 was 7.0%. Any premium or discount on bonds are amortized using the effective interest rate method. 6. The abbreviated financial statements of both companies are provided in a separate Excel spreadsheet. Required: (SHOW ALL CALCULATIONS CLEARLY) a) b) Using Excel, prepare the consolidated income statement and consolidated statement of financial position for the Paganini Group for the year ended December 31, 2022. Show the necessary journal entries in the records of Paganini for 2022, assuming Paganini is using the equity method to account for its investment in Strauss. STATEMENTS OF FINANCIAL POSITION December 31, 2022 Paganini Strauss Sales Assets Property, plant & equipment - Cost - Accumulated depreciation $735,200 $1,516,000 -$331,300 -$682,200 $403,900 $833,800 Investment in Strauss $560,000 Non-current loan to subsidiary $75,000 Inventory $488,700 $544,200 Current receivables $171,300 $191,000 Cash $86,000 $1,784,900 $61,400 $1,630,400 Shareholders' equity and liabilities Ordinary shares $780,000 $400,000 Retained earnings Bonds payable $551,300 $547,600 $100,000 Other non-current liabilities $400,000 $356,000 Current payables $53,600 $226,800 $1,784,900 $1,630,400 INCOME STATEMENTS For the year ended December 31, 2022 Cost of goods sold Gross profit Depreciation expense Other expenses Operating income Net income before taxes Paganini Strauss $5,880,000 $6,000,000 $4,404,000 $4,500,000 $1,476,000 $1,500,000 $129,600 $59,000 $1,123,000 $1,146,500 $294,000 $223,900 Non-operating income and expenses $83,200 $62,300 $377,200 $286,200 Income tax $94,300 $71,600 Profit $282,900 $214,600 Question 2 On January 1, 2016, Paganini Inc. bought 80% of Strauss Inc.'s 500,000 outstanding ordinary shares for $1.40 per share, the fair value of all of Strauss' ordinary shares. On this day, Strauss had ordinary shares of $400,000 and retained earnings of $250,000 on its statement of financial position. All assets and liabilities of Strauss were fairly valued on this date, except for the following items: Inventory: Equipment: Land Bonds payable Overvalued by $30,000 Overvalued by $48,000 (16 years useful life left) Undervalued by $100,000 See point 5 below Additional information: 1. Paganini is a public company and uses the cost method to account for its investment in Strauss. 2. Paganini charges Strauss $4,000 management fee per month. 3. Goodwill on acquisition was impaired by $35,000 and $10,000 in 2020 and 2022, respectively. 4. Paganini paid dividends of $37,000 and Strauss paid dividends of $43,000 during 2022. 5. On January 1, 2011, Strauss issued $100,000, 15-year bonds at par. The bonds have a coupon rate of 8.5% and pays interest annually. The market rate of interest on similar bonds on January 1, 2016 was 7.0%. Any premium or discount on bonds are amortized using the effective interest rate method. 6. The abbreviated financial statements of both companies are provided in a separate Excel spreadsheet. Required: (SHOW ALL CALCULATIONS CLEARLY) a) b) Using Excel, prepare the consolidated income statement and consolidated statement of financial position for the Paganini Group for the year ended December 31, 2022. Show the necessary journal entries in the records of Paganini for 2022, assuming Paganini is using the equity method to account for its investment in Strauss. STATEMENTS OF FINANCIAL POSITION December 31, 2022 Paganini Strauss Sales Assets Property, plant & equipment - Cost - Accumulated depreciation $735,200 $1,516,000 -$331,300 -$682,200 $403,900 $833,800 Investment in Strauss $560,000 Non-current loan to subsidiary $75,000 Inventory $488,700 $544,200 Current receivables $171,300 $191,000 Cash $86,000 $1,784,900 $61,400 $1,630,400 Shareholders' equity and liabilities Ordinary shares $780,000 $400,000 Retained earnings Bonds payable $551,300 $547,600 $100,000 Other non-current liabilities $400,000 $356,000 Current payables $53,600 $226,800 $1,784,900 $1,630,400 INCOME STATEMENTS For the year ended December 31, 2022 Cost of goods sold Gross profit Depreciation expense Other expenses Operating income Net income before taxes Paganini Strauss $5,880,000 $6,000,000 $4,404,000 $4,500,000 $1,476,000 $1,500,000 $129,600 $59,000 $1,123,000 $1,146,500 $294,000 $223,900 Non-operating income and expenses $83,200 $62,300 $377,200 $286,200 Income tax $94,300 $71,600 Profit $282,900 $214,600