On December 31, Year 6, Ultra Software Limited purchased 70,000 common shares
(70%) of a major competitor, Personal Program Corporation (PPC), at $30 per
share. Several shareholders who were unwilling to sell at that time owned the
remaining common shares and the preferred shares.
The preferred shares, which are non-cumulative, are entitled to a $12 divi-
dend. Each is convertible into two common shares. Immediate conversion of these
preferred shares has been, and will continue to be, highly unlikely due to the cur-
rent market conditions for the shares. Management is concerned, however, about
the effect that any future conversion would have.
At December 31, Year 6, PPC€™s net assets had a carrying amount of $1,525,000.
The identifiable assets and liabilities had carrying amounts equal to fair values,
with the following exceptions:
€¢ Software patents and copyrights had a total market value estimated as
$300,000 above carrying amount. These were expected to have a five-year use-
ful life.
€¢ Inventories of packaged software had a cost to PPC of $20,000 and an esti-
mated selling price of $140,000. Estimated future selling expenses for these
items were $15,000.
€¢ An unrecorded brand name had an estimated fair value of $2,375,000. This
will be amortized over 40 years.
€¢ In determining the purchase price, the management of Ultra noted that PPC
has two years remaining on a long-term contract to supply seats to a major
car manufacturer. Given the rapid rise in input costs, PPC earns a negative
gross margin on this contract. An independent appraiser indicated that the
fair value of this unfavourable supply contract is a negative $500,000.
The trial balances at December 31, Year 8, for these two companies are pro-
vided as Exhibit IV .

In Year 7, PPC sold packaged software costing $30,000 to Ultra at a price of
$45,000. Of this software, 60% was still in Ultra€™s inventory at December 31, Year
7. During Year 8, packaged software costing $42,000 was sold by PPC to Ultra for
$60,000. Ultra€™s inventory at December 31, Year 8, included $22,000 of goods pur-
chased in this sale. Neither of these packaged software inventories sold to Ultra
had a fair value difference at acquisition.
Goodwill is tested for impairment on an annual basis. Each year, it was deter-
mined that goodwill was not impaired.
Included in the Year 8 income of PPC was a gain of $50,000 on the sale of pat-
ents to another company. This sale took place on June 30, Year 8. These patents had
a fair value difference of $20,000 at acquisition.
On September 30, Year 8, Ultra sold surplus computer hardware to PPC. This
equipment had a cost of $6,000,000, was one-half depreciated, and was sold for its
fair value of $2,000,000. Disassembly and shipping costs of $80,000 were paid by
Ultra. There was estimated to be a nine-year remaining useful life in its new use.
Preferred dividends were paid in all years, and no new shares have been
issued since the acquisition date.
Assume a 40% tax rate.
Required:
(a) In accordance with GAAP, prepare the following:
(i) Consolidated income statement for the year ended December 31, Year 8.
(ii) Consolidated statement of retained earnings for the year ended Decem-
ber 31, Year 8.
(iii) Schedule showing the values of the following consolidated balance sheet
accounts as at December 31, Year 8:
(1) Software patents and copyrights
(2) Packaged software inventory
(3) Non-controlling interest
(b) Write a brief note to the management of Ultra outlining the financial reporting
implications in the event that the preferred shareholders of PPC exercise their
conversion privilege.

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EXHIBIT IV TRIAL BALANCES at December 31, Year 8 in Thousands of Dollars Ultra 320 300 350 350 540 800 450 2,100 PPC $ 150 280 380 450 675 925 200 Cash Accounts receivable Inventory Patents and copyrights Furniture and equipment (net) Building (net) Land Investment in PPC Accounts payable Mortgage payable Bank loan payable Preferred shares (12,500 outstanding) Common shares (300,000 outstanding) Common shares (100,000 outstanding) Retained earnings Sales Other income Gain on sale of patent Loss on sale of computer Cost of purchases Change in inventory Other expenses (incl. tax) Depreciation Interest Dividends S 340 350 $ 138 320 1,400 100 4,530 50 3,000 1,300 6,200 120 1,080 4,035 2,590 10 675 142 35 150 $11,310 $11,310 $6,662 850 75 45 $6,662