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Problem 5-12K Hway LO1, 2, 3, 4 Foxx Corp. purchased 75% of the outstanding shares of Rabb Ltd. on January 1, Year 3. at a cost of $117.000. Non-controlling interest was valued at $35.000 by an independent business valuator at the date of acquisition. On that date, Rabb had common shares of $50,000 and retained earnings of $30,000. Fair values were equal to carrying amounts for all the net assets except the following: Inventory Equipment Software Carrying Amount $30,000 45.000 Fair Value $19,000 69,000 15,000 291 CHAPTER 5 Consolidation Subsequent to Acquisition Date The equipment had an estimated remaining useful life of six years on January 1, Year 3, and the software w to be amortized over ten years. Foxx uses the cost method to account for its investment. The testing for impairmen at December 31, Year 6, yielded the following fair values: Software Goodwill $ 8.000 20,000 The impairment loss on these assets occurred entirely in Year 6. Amortization expense is grouped with admi astrative expenses, and impairment losses are grouped with miscellaneous expenses. The parent's share of the god will noted above is $16,364. The following are the financial statements of Foxx Corp. and its subsidiary Rabb Ltd. for Year 6 BALANCE SHEETS At December 31, Year 6 Foxx Corp. 40,000 Cash Accounts receivable Note receivable Inventory Equipment, net Land Investment in Rabb Rabb Ltd. $ 10,000 30.000 40,000 44,000 76,000 30,000 $230,000 66,000 220,000 150,000 117.000 $593.000 $ 90,000 70,000 40,000 150,000 243.000 $593,000 60,000 Bank indebtedness Accounts payable Notes payable Common shares Retained earnings 50,000 120.000 $230,000 will noted above Is The following are the financial statements BALANCE SHEETS At December 31. Year 6 Four Corp Rabb Lid. $ 10,000 30,000 40,000 44,000 76,000 30.000 40,000 Cash $230,000 Accounts receivable Note receivable Inventory Equipment, net Land Investment in Rabb 60.000 66.000 220.000 150,000 117.000 $593,000 $ 90,000 70.000 40,000 150,000 243,000 $593,000 50.000 120,000 $230,000 Bank indebtedness Accounts payable Notes payable Common shares Retained earnings STATEMENTS OF RETAINED EARNINGS Year ended December 31, Year 6 Retained earnings, January 1, Year 6 $153,000 120,000 Dividends (30,000) Retained earnings, December 31, Year 6 $243.000 $ 92.000 48,000 (20,000) $120.000 Net income INCOME STATEMENTS For the year ended December 31, Year 6 $821,000 Sales Investment income $320,000 3.600 323,600 200,000 12.000 31,600 15,000 836,000 480,000 40,000 116,000 80,000 716,000 $120,000 Cost of sales Administrative expenses Miscellaneous expenses Income taxes 32,000 275,600 $ 48,000 Net income Additional Information The notes payable are intercompany. 292 CHAPTER 5 Consolidation Subsequent to Acquisition Date Required (a) Prepare the Year 6 consolidated financial statements h Calculate goodwill impairment loss and non-controlling interest on the consolidated income statement for year ended December 31. Year 6, under the identifiable net assets method IT Foxx used the identifiable net assets method rather than the fair value enterprise method, how would affect the debt-to-equity ratio at the end of Year 67 Problem 5-12K Hway LO1, 2, 3, 4 Foxx Corp. purchased 75% of the outstanding shares of Rabb Ltd. on January 1, Year 3. at a cost of $117.000. Non-controlling interest was valued at $35.000 by an independent business valuator at the date of acquisition. On that date, Rabb had common shares of $50,000 and retained earnings of $30,000. Fair values were equal to carrying amounts for all the net assets except the following: Inventory Equipment Software Carrying Amount $30,000 45.000 Fair Value $19,000 69,000 15,000 291 CHAPTER 5 Consolidation Subsequent to Acquisition Date The equipment had an estimated remaining useful life of six years on January 1, Year 3, and the software w to be amortized over ten years. Foxx uses the cost method to account for its investment. The testing for impairmen at December 31, Year 6, yielded the following fair values: Software Goodwill $ 8.000 20,000 The impairment loss on these assets occurred entirely in Year 6. Amortization expense is grouped with admi astrative expenses, and impairment losses are grouped with miscellaneous expenses. The parent's share of the god will noted above is $16,364. The following are the financial statements of Foxx Corp. and its subsidiary Rabb Ltd. for Year 6 BALANCE SHEETS At December 31, Year 6 Foxx Corp. 40,000 Cash Accounts receivable Note receivable Inventory Equipment, net Land Investment in Rabb Rabb Ltd. $ 10,000 30.000 40,000 44,000 76,000 30,000 $230,000 66,000 220,000 150,000 117.000 $593.000 $ 90,000 70,000 40,000 150,000 243.000 $593,000 60,000 Bank indebtedness Accounts payable Notes payable Common shares Retained earnings 50,000 120.000 $230,000 will noted above Is The following are the financial statements BALANCE SHEETS At December 31. Year 6 Four Corp Rabb Lid. $ 10,000 30,000 40,000 44,000 76,000 30.000 40,000 Cash $230,000 Accounts receivable Note receivable Inventory Equipment, net Land Investment in Rabb 60.000 66.000 220.000 150,000 117.000 $593,000 $ 90,000 70.000 40,000 150,000 243,000 $593,000 50.000 120,000 $230,000 Bank indebtedness Accounts payable Notes payable Common shares Retained earnings STATEMENTS OF RETAINED EARNINGS Year ended December 31, Year 6 Retained earnings, January 1, Year 6 $153,000 120,000 Dividends (30,000) Retained earnings, December 31, Year 6 $243.000 $ 92.000 48,000 (20,000) $120.000 Net income INCOME STATEMENTS For the year ended December 31, Year 6 $821,000 Sales Investment income $320,000 3.600 323,600 200,000 12.000 31,600 15,000 836,000 480,000 40,000 116,000 80,000 716,000 $120,000 Cost of sales Administrative expenses Miscellaneous expenses Income taxes 32,000 275,600 $ 48,000 Net income Additional Information The notes payable are intercompany. 292 CHAPTER 5 Consolidation Subsequent to Acquisition Date Required (a) Prepare the Year 6 consolidated financial statements h Calculate goodwill impairment loss and non-controlling interest on the consolidated income statement for year ended December 31. Year 6, under the identifiable net assets method IT Foxx used the identifiable net assets method rather than the fair value enterprise method, how would affect the debt-to-equity ratio at the end of Year 67