The financial statements of Parent Corporation and its subsidiary, Sub Company, as of December 31, Year 6, are presented below.

STATEMENTS OF FINANCIAL POSITION
December 31, Year 6
	Parent			Sub
Land	$	180,000			$	24,000
Plant and equipment		535,000				68,000
Accumulated depreciation		(235,000	)			(22,000	)
Investment in Sub		143,039				-
Inventory		34,000				32,000
Notes receivable		-				58,000
Accounts receivable		17,700				11,400
Cash		12,700				14,400
	$	687,439			$	185,800
Ordinary shares	$	100,000			$	50,000
Retained earnings		266,400				91,000
Notes payable		58,000				-
Accounts payable		263,039				44,800
	$	687,439			$	185,800

STATEMENTS OF PROFITYear 6
	Parent			Sub
Sales	$	950,000			$	271,000
Management fee revenue		29,000				-
Interest revenue		-				7,300
Equity method income from Sub		1,730				-
Gain on sale of land		-				38,000
		980,730				316,300
Cost of goods sold		590,000				196,000
Interest expense		20,500				-
Other expenses		185,000				75,300
Income tax expense		85,000				16,000
		(880,500	)			(287,300	)
Profit	$	100,230			$	29,000

Additional Information

• Parent purchased 70% of the outstanding shares of Sub on January 1, Year 4, at a cost of $98,000. On that date, Sub had accumulated depreciation of $15,000, retained earnings of $20,000, and fair values were equal to carrying amounts for all its net assets, except inventory (overvalued by $17,000).
• In determining the purchase price, the management of Parent noted that Sub, as lessee, leases a warehouse that has terms that are unfavourable relative to market terms. However, the lease agreement explicitly prohibits transfer of the lease (through either sale or sublease). An independent appraiser indicated that the fair value of this unfavourable lease agreement is $23,000. There were five years remaining on this lease on the date of acquisition.
• The companies sell merchandise to each other at a gross profit rate of 25%.
• The December 31, Year 5, inventory of Parent contained purchases made from Sub amounting to $19,000. There were no intercompany purchases in the inventory of Sub on this date.
• During Year 6 the following intercompany transactions took place:
• Sub made a payment of $29,000 to Parent for management fees, which was recorded under the categoryother expenses.
• Sub made sales of $114,000 to Parent. The December 31, Year 6, inventory of Parent contained goods purchased from Sub amounting to $32,000.
• Parent made sales of $132,000 to Sub. The December 31, Year 6, inventory of Sub contained goods purchased from Parent amounting to $23,000.
• On July 1, Year 6, Parent borrowed $58,000 from Sub and signed a note bearing interest at 12% per annum. The interest on this note was paid on December 31, Year 6.
• During the year, Sub sold land to Parent and recorded a gain of $38,000 on the transaction. This land is being held by Parent on December 31, Year 6.
• Goodwill impairment losses occurred as follows: Year 4, $2,900; Year 5, $580; Year 6, $1,450.
• Neither Parent nor Page paid any dividends during the year.
• Parent uses the equity method to account for its investment in Sub.
• Both companies pay income tax at 40% on their taxable incomes.

Required:

(a)Prepare the following consolidated financial statements for Year 6:

(i)Income statement

(ii)Statement of financial position

(b) Include the following calculations for Year 6:

(i) Acquisition Differential and Goodwill amounts

(ii) Changes to Acquisition Differential from Year 4 to Year 6

(iii) Inter-company revenues and expenses

(iv) Inter-company profits (including before and after-tax amounts)

(v) Deferred Tax amounts

(vi) Consolidated income calculation (include attributable to Parent and NCI amounts)

(vii) NCI amount for SFP

The financial statements of Parent Corporation and its subsidiary, Sub Company, as of December 31, Year 6, are presented below.

STATEMENTS OF FINANCIAL POSITION
December 31, Year 6
	Parent			Sub
Land	$	180,000			$	24,000
Plant and equipment		535,000				68,000
Accumulated depreciation		(235,000	)			(22,000	)
Investment in Sub		143,039				-
Inventory		34,000				32,000
Notes receivable		-				58,000
Accounts receivable		17,700				11,400
Cash		12,700				14,400
	$	687,439			$	185,800
Ordinary shares	$	100,000			$	50,000
Retained earnings		266,400				91,000
Notes payable		58,000				-
Accounts payable		263,039				44,800
	$	687,439			$	185,800

STATEMENTS OF PROFITYear 6
	Parent			Sub
Sales	$	950,000			$	271,000
Management fee revenue		29,000				-
Interest revenue		-				7,300
Equity method income from Sub		1,730				-
Gain on sale of land		-				38,000
		980,730				316,300
Cost of goods sold		590,000				196,000
Interest expense		20,500				-
Other expenses		185,000				75,300
Income tax expense		85,000				16,000
		(880,500	)			(287,300	)
Profit	$	100,230			$	29,000

Additional Information

• Parent purchased 70% of the outstanding shares of Sub on January 1, Year 4, at a cost of $98,000. On that date, Sub had accumulated depreciation of $15,000, retained earnings of $20,000, and fair values were equal to carrying amounts for all its net assets, except inventory (overvalued by $17,000).
• In determining the purchase price, the management of Parent noted that Sub, as lessee, leases a warehouse that has terms that are unfavourable relative to market terms. However, the lease agreement explicitly prohibits transfer of the lease (through either sale or sublease). An independent appraiser indicated that the fair value of this unfavourable lease agreement is $23,000. There were five years remaining on this lease on the date of acquisition.
• The companies sell merchandise to each other at a gross profit rate of 25%.
• The December 31, Year 5, inventory of Parent contained purchases made from Sub amounting to $19,000. There were no intercompany purchases in the inventory of Sub on this date.
• During Year 6 the following intercompany transactions took place:
• Sub made a payment of $29,000 to Parent for management fees, which was recorded under the categoryother expenses.
• Sub made sales of $114,000 to Parent. The December 31, Year 6, inventory of Parent contained goods purchased from Sub amounting to $32,000.
• Parent made sales of $132,000 to Sub. The December 31, Year 6, inventory of Sub contained goods purchased from Parent amounting to $23,000.
• On July 1, Year 6, Parent borrowed $58,000 from Sub and signed a note bearing interest at 12% per annum. The interest on this note was paid on December 31, Year 6.
• During the year, Sub sold land to Parent and recorded a gain of $38,000 on the transaction. This land is being held by Parent on December 31, Year 6.
• Goodwill impairment losses occurred as follows: Year 4, $2,900; Year 5, $580; Year 6, $1,450.
• Neither Parent nor Page paid any dividends during the year.
• Parent uses the equity method to account for its investment in Sub.
• Both companies pay income tax at 40% on their taxable incomes.

Required:

(a)Prepare the following consolidated financial statements for Year 6:

(i)Income statement

(ii)Statement of financial position

(b) Include the following calculations for Year 6:

(i) Acquisition Differential and Goodwill amounts

(ii) Changes to Acquisition Differential from Year 4 to Year 6

(iii) Inter-company revenues and expenses

(iv) Inter-company profits (including before and after-tax amounts)

(v) Deferred Tax amounts

(vi) Consolidated income calculation (include attributable to Parent and NCI amounts)

(vii) NCI amount for SFP

Answer rating: 100% (QA)

To prepare the consolidated financial statements for Year 6 well follow these steps a Consolidated Financial Statements i Income Statement beginalign ... View the full answer