On January 1^st. 2017, the X Company purchased 60% of the Y Company for $900,000. At this date the book values and fair values of Y were as follows:-

Book Value………… Fair Value

Cash……………………………………………………………………………..…$ 300,000………………………$300,000

Accounts receivable……………………………………………………………280,000………………………..250,000

Inventory………………………………………………………………………….. 320,000………………………..360,000

Equipment (net)………………………………………………………………… 700,000……………………. 630,000

$1,600,000

Accounts Payable………………………………………………………………$ 240,000…………………….$260,000

Long-term debt………………………………………………………………….. 120,000……………….………200,000

Common Stock…………………………………………………………………… 800,000

Retained Earnings……………………………………………………………….. 440,000

$1,600,000

The 2021 financial statements of X& Y are as follows:-

X&Y Company

Balance Sheets

December 31^st. 2021

X……………………..Y…..

Cash…………………………………………………………………………………………………..300,000………………240,000

Accounts Receivable……………………………………………………………………………780,000……………..300,000

Due from Y………………………………………………………………………………………….105,000

Inventory……………………………………………………………………………………………..970,000…………….500,000

Investment in Y…………………………………………………………………………………….900,000

Equipment(net)………………………………………………………………………………1,405,000…………….800,000

TOTAL ASSETS…………………………………………………………………………………$4,460,000…….….$1,840,000

Accounts Payable……………………………………………………………………………….1,040,000……………..250,000

Due to X………………………………………………………………………………………….………………………………..105,000

Long-term liabilities……………………………………………………………………………. 600,000………………205,000

Common shares………………………………………………………………………………. 2,000,000………………800,000

Retained Earnings……………………………………………………………………………… 820,000……………480,000

TOTAL LIABILITIES AND OWNERS’ EQUITY……………………………………….…$4,460,000…………$1,840,000

X&Y COMPANY

Statements of Income and Retained Earnings

Year ended December 31^st. 2021

X…………………Y……….

Sales………………………………………………………………………………………………..$1,900,000…………..$1,000,000

Dividend Income……………………………………………………………………………….. 60,000…………………0…………

Interest Income…………………………………………………………………………………... 10,000…………..0………

TOTAL REVENUE……………………………………………………………………………….$1,970,000…………$1,000,000

Cost of Goods Sold…………………………………………………………………………… 1,200,000………...…..700,000

770,000…………….. 300,000

Expenses:-

Selling and administrative………………………………………………………………………..200,000…………… 50,000

Amortization……………………………………………………………………………………………. 80,000……………… 40,000

Interest and other expenses……………………………………………………………………… 90,000…………….. 30,000

Income Tax expense………………………………………………………………………………….160,000…………. 72,000

NET INCOME……………………………………………………………………………………………. 240,000……………...108,000

Retained Earnings, January 1^st.2021………………………………………………… ……… 700,000……………...472,000

Dividends………………………………………………………………………………………………….(120,000)………….(100,000)

Retained Earnings, December 31^st. 2021…………………………………………………$820,000………….$480,000

Additional Information:-

i. As of January 1^st, 2017, the capital assets of Y had a remaining useful life of 10 years. The long -term debt matures in 5 years.

ii. Each year goodwill is evaluated to determine if there has been a permanent impairment.

Goodwill impairment was $70,000 in 2019, $60,000 in 2020 and $50,000 in 2021.

iii. During 2020, Y sold goods to X for $300,000. All goods sold by Y have a gross profit margin of 30% of the selling price. Of these goods, $200,000 still remained in the 2020 inventory of X. In 2021 Y sold $400,000 worth of goods to X. These remained in X’s ending inventory at December 31^st. 2021.

iv. Sales of finished goods from X to Y in 2020 totaled $88,000 and in 2021 $110,000. These goods were priced at a mark up of 10% on cost. In 2020 , 25% remained in inventory at the year and in 2021 it was 40%

v. On July 1^st. 2018, X sold a machine to Y for $150,000 cash and recognized a gain of $50,000. This machine had a remaining useful life of 5 years at the time of the sale.

vi. Both companies pay taxes at the rate of 40%.

Required:-

1. Explain the IFRS requirement for the treatment of :-

a. Negative goodwill(1.5 marks)

b. Subsidiary’s goodwill(1.5 marks)

2. Calculate under the NET IDENTIFIABLE METHOD, the following items for the consolidated balance sheet at December 31^st. 2021:-

a. Goodwill (2 marks)

b. Equipment2 marks)

Answer rating: 100% (QA)

1 Negative goodwill According to IFRS 3 Business Combinations the negative goodwill should be recognized in the consolidated statement of comprehensiv... View the full answer