P Inc. purchased 80% of the voting shares of S Inc. for $800,000 cash on January 1, Year 4. On that date, S’s Common Stock and Retained Earnings were valued at $100,000 and $500,000 respectively. P uses the cost method to account for its investment.

S’s fair values approximated its carrying values with the following exception:

· The equipment previously expensed by S had a fair value of $ 40,000, with an estimated remaining useful life of 8 years and no salvage value.

· S’s current liabilities to third parties had a fair value of $10,000 less than book value. This liability was paid in Year 4.

The Financial Statements of P & S for the year ended December 31, Year 8 are shown below:

Income Statements

P Inc. S Inc.

Sales $1,600,000 $900,000

Other Revenues 120,000 260,000

Less: Expenses:

Cost of Goods Sold: 800,000 500,000

Depreciation & Amortization Expense 60,000 50,000

Other Expenses 350,000 340,000

Income Tax Expense 170,000 200,000

Net Income $340,000 $70,000

Retained Earnings Statements

Balance, Jan 1, Year 7 1,200,000 970,000

Net Income 340,000 70,000

Less: Dividends (200,000) (100,000)

Retained Earnings $1,340,000 $940,000

Balance Sheets

P Inc. S Inc.

Cash 180,000 $220,000

Accounts Receivable 390,000 360,000

Inventory 280,000 200,000

Investments 800,000 10,000

Land 180,000 280,000

Equipment (net) 270,000 170,000

Total Assets $2,100,000 $1,240,000

Current Liabilities 160,000 200,000

Common Shares 600,000 100,000

Retained Earnings 1,340,000 940,000

Total Liabilities and Equity $2,100,000 $1,240,000

Other Information:

1. During Year 5, S sold a parcel of land to P for $150,000 cash. S had purchased this land in 2013 for $100,000. P sold the land to third party in Year 8.

2. During December Year 7, P sold inventory to S for $100,000 cash, the cost of the inventory to P was $70,000. 20% of these goods remained in S’s inventory at the end of Year 7. The inventory was sold to a third party during Year 8.

3. On December 30^th, Year 8, P sold inventory to S for $100,000, the cost of the inventory to P was $75,000. All the inventory remained in S’s inventory at the end of Year 8. S paid $60,000 cash on delivery and the remaining $40,000 on March 2^nd, Year 9.

4. The Common Shares of P & S did not change since the date of acquisition.

5. Both companies use straight-line amortization exclusively for all assets and liabilities.

6. The effective tax rate for both companies is 40%.

7. P has recorded the investment in S at Cost.

8. For Consolidation, P uses the FVE method.

Question 1:

Calculate Goodwill at the time of acquisition.

Question 2:

Calculate Consolidated NI

Question 3:

On the Consolidated Income Statements for year 8, what is Consolidated Sales?

Question 4:

On the Consolidated Income Statements for year 8, what is Consolidated COGS?

Question 5:

On the Consolidated Income Statements for year 8, what is Consolidated Other Income?

Question 6:

On the Consolidated Income Statements for year 8, what is Consolidated Depreciation Expense?

Question 7:

On the Consolidated Income Statements for year 8, what is the Consolidated value for Equipment (net)?

Question 8:

On the Consolidated Balance Sheet as of year-end 8, what is Consolidated Inventory?

Question 9:

On the Consolidated Balance Sheet as of year-end 8, what is the NCI amount?

Question 10:

On the Consolidated Balance Sheet as of year-end 8, what is Consolidated DIT?

Answer rating: 100% (QA)

Answer 1 Goodwill at the time of acquisition can be calculated by subtracting the fair value of S Incs assets and liabilities from the cost of acquisi... View the full answer