On July 1, 2013, Grenada Ltd. purchased 70% of the outstanding common shares of Carriacou Company for
Question:
On July 1, 2013, Grenada Ltd. purchased 70% of the outstanding common shares of Carriacou Company for $266,000. On that date, Carriacou’s shareholders’ equity consisted of common shares of $25,000 and retained earnings of $130,000.
Following are the financial statements of Grenada Ltd. and Carriacou Company for 2018:
Additional information:
On the acquisition date, Grenada’s management believed that all of Carriacou’s assets were fairly valued except for inventory which was undervalued by $2,000 and equipment with a remaining useful life of ten years that was undervalued by $10,000. Current liabilities were considered to be fairly valued but long-term debt with a carrying value of $10,000 was considered to have a fair value of $11,200. That debt matured on June 30, 2019.
Goodwill impairment was considered to have occurred during 2016 and 2018 in the amounts of $4,000 and $6,000 respectively.
During 2018, Carriacou purchased inventory from Grenada for $118,000. Carriacou’s inventories contained goods purchased form Grenada for $68,000 at December 31, 2017 and $22,200 at December 31, 2018. All intercompany sales are priced to yield a gross profit of 50%.
On January 1, 2015, Grenada sold some equipment to Carriacou for $60,000 and recorded a pre-tax gain of $7,200 on the sale. This equipment had a remaining life of eight years on the date of the intercompany sale.
The parent company charges its subsidiary $1,000 a month for rent and did so throughout 2017 and 2018. Rental income is included in other revenue and rental expense is included in other expenses.
Grenada uses the cost method to account for its investment in Carriacou. It values the noncontrolling interest in Carriacou using the fair value enterprise approach.
Both companies pay income taxes at the rate of 40%.
Required:
a) Prepare a consolidated statement of income and retained earnings for the year ended December 31, 2018.
b) Calculate the following balances that would appear in the consolidated statement of financial position as at December 31, 2018:
i) inventory;
ii) deferred income tax asset;
iii) goodwill;
iv) long-term debt;
v) non-controlling interest
Financial Accounting An Introduction to Concepts, Methods and Uses
ISBN: 978-1133591023
14th edition
Authors: Roman L. Weil, Katherine Schipper, Jennifer Francis