Pizza Incorporated acquired 70% of the outstanding common shares of Spaghetti Company on July 1, 2009, in

Fantastic news! We've Found the answer you've been seeking!

Question:

Pizza Incorporated acquired 70% of the outstanding common shares of Spaghetti Company on July 1, 2009, in exchange for 100,000 of its own shares with a market value of $2,100,000. The costs of issuing the shares amounted to $70,000 and the other costs related to the acquisition totaled $140,000. On the acquisition date, Spaghetti had a share capital of $1,400,000 and retained earnings of $1,000,000.The carrying values of the company’s net assets were equal to their fair values except for the following:

Book value air value

Inventories $120,000 $100,000

Equipment (at cost) $800,000 $750,000

Equipment (accumulated amortization) $200,000

Patent --- $100,000

Long-term debt $600,000 $650,000

The inventories were all sold within twelve months of the acquisition date. The capital assets had a remaining economic life of fifteen years and the patent had a remaining economic life of ten years. The long-term debt matured on June 30, 2014. Goodwill was assessed for impairment each year. An impairment loss of $50,000 was identified for 2010 and $60,000 in 2013. No losses were identified in any other year.

During 2012, Pizza sold inventory to Spaghetti at a sales price of $1,000,000, earning a gross profit of 40% on the sale. Half of this inventory was still on hand at the end of 2012. In 2013, Pizza sold inventory to Spaghetti for $1,200,000, again earning a gross profit of 40% on the sale. One-quarter of this inventory was still on hand at December 31, 2013. At the end of December of both 2012 and 2013, Spaghetti owed Pizza for one-quarter of the purchases of the previous year.

On July 1, 2012, Spaghetti sold a parcel of land and the building on that land to Pizza. The selling price was a total of $1,500,000, of which one-third was for the land. Prior to the sale, Spaghetti’s carrying value for the land was $450,000 and for the building was $800,000. The building had an estimated useful life of ten years on the date of the intercompany sale.

During 2013, Pizza earned net income of $300,000 and declared dividends of $300,000 and Spaghetti earned income of $300,000 and declared dividends of $200,000. Both companies declared dividends in equal amounts on June 30 and December 31, paying the dividends fifteen days later. Both companies pay income tax at a marginal rate of 30%.

The pizza uses the cost method to account for its investment in Spaghetti and values the non-controlling interest in the subsidiary’s shares at their fair value proportionate to the price paid for their controlling interest.

The balance sheets of the two companies as at December 31, 2013 were as follows:

Required:

a) Calculate the amount of consolidated net income that Pizza would report in its consolidated financial statements for the year ended December 31, 2013. (Note: a consolidated income statement is not required).

b) Prepare the consolidated balance sheet of Pizza and its subsidiary as of December 31, 2013