On January 1, 2017, Motley Inc. acquired 92,000 common shares (92%) of Crue Ltd. for $908,960. On this date, shares of Crue Ltd. were trading on the open market at $8.50 per share and the company's shareholders equity section reported common shares of $220,000 and retained earnings of $380,000. The fair values of Crue Ltd.’s assets and liabilities approximated their carrying values on that date, with the following exceptions:

• Inventory was overvalued on the balance sheet by $15,000.
• Plant and Equipment was undervalued on the balance sheet by $5,000.
• The fair value of bonds payable was $12,000 lower than their carrying value.

In addition, Crue Ltd. owned internally created software which was estimated to have a fair value of $36,000. Motley Inc. decided to amortize the software over six years. The plant and equipment had an estimated remaining useful life of five years from the date of acquisition, while bonds payable were due to mature in ten years.

Included as a file attachment are the separate-entity financial statements of both Motley Inc. and Crue Ltd. for the year ended December 31, 2020. Both companies use the straight-line method for depreciating tangible assets and for amortizing bond discounts or premiums. In addition, both companies use the FIFO inventory assumption. Motley Inc. uses the cost method to account for its investment in Crue Ltd.

Additional information:

• Intercompany sales of inventory between the two companies was as follows:
  • Motley to Crue: $58,000 in 2019, $72,000 in 2020
  • Crue to Motley: $65,000 in 2019, $48,000 in 2020
• Total amount of product purchased inter-company that remained in ending inventory was as follows:
  • Crue (purchased from Motley): $44,000 at the end of 2019, $32,000 at the end of 2020
  • Motley (purchased from Crue): $28,000 at the end of 2019, $43,000 at the end of 2020
• Both Motley and Crue price their sales to each other to provide a gross profit of 20%.
• On October 31, 2019 Crue Ltd. sold a parcel of land with a carrying value of $46,000 to Motley Inc. for $72,000 cash. As of December 31, 2021, that land was still held by Motley Inc.
• An impairment test on goodwill arising from the Motley-Crue business combination determined that the recoverable amount for goodwill was $320,000 on December 31, 2020.
• The effective tax rate for both companies is 40%.

Required:

a) Prepare a detailed calculation of the acquisition differential and its allocation (including goodwill, if applicable) arising from Motley Inc.'s acquisition of Crue Ltd. (7 marks)

b) Prepare an acquisition differential depletion/amortization schedule showing changes up to the beginning of 2019, the changes in 2020, and the ending balances at December 31, 2020. Show the allocation of AD between the parent company's share and the non-controlling interests' share. (8 marks)

c) Prepare a schedule of intercompany profits for the year ended December 31, 2020. Clearly distinguish between upstream and downstream amounts. (5 marks)

d) Prepare detailed calculations of Motley Inc.'s consolidated net income attributable to Motley Inc. shareholders and consolidated net income attributable to non-controlling interests for the year ended December 31, 2020. Do NOT prepare a consolidated income statement. (12 marks)

e) Prepare a detailed calculation of Motley Inc.'s consolidated retained earnings at December 31, 2020. (8 marks)

f) Prepare a detailed calculation of non-controlling interest appearing on Motley Inc.'s consolidated balance sheet at December 31, 2020. (6 marks)

g) Prepare Motley Inc.'s consolidated balance sheet at December 31, 2020. (14 marks)

Answer rating: 100% (QA)

a Detailed calculation of the acquisition differential and its allocation The acquisition differential is the difference between the fair value of the ... View the full answer