On January 1, 2017, Picasso Corporation, parent company purchased 70% of the outstanding shares of Monet Company for $2,600,000.  At that date, the book values and fair values of Monet’s assets and liabilities were as follows:

MONET COMPANY

January 1, 2017

 

                                                                                    Book Value                Fair Value

Cash                                                                            $   200,000                  $   200,000

Accounts receivable                                                        600,000                       600,000

Inventory                                                                      1,100,000                    1,200,000

Property, plant and equipment, net                               3,000,000                    2,800,000

Patent                                                                                       0 _                         50,000

                                                                                    $4,900,000                  $4,850,000

 

Accounts payable                                                       $   500,000                  $   500,000

Bonds payable                                                                 800,000                       800,000

Common shares                                                            2,000,000                                          

Retained earnings                                                         1,600,000

                                                                                    $4,900,000

 

Picasso uses the cost method to account for its investment in Monet.  The companies’ balance sheets and income statements at December 31, 2020 were as follows:

 

PICASSO CORPORATION AND MONET COMPANY

Balance Sheets

December 31, 2020

 

                                                                                     PICASSO                      MONET  _

Cash                                                                            $   400,000                  $   450,000

Accounts receivable                                                     1,000,000                       850,000

Inventory                                                                      1,500,000                    1,100,000

Property, plant and equipment                                     4,400,000                    3,000,000

Accumulated Amortization                                        (1,000,000)                    (500,000)

Investment in Monet Company                                    2,600,000                                  _

                                                                                    $8,900,000                  $4,900,000

 

Accounts payable                                                       $   500,000                  $   300,000

Bonds payable                                                                 800,000                       800,000

Common shares                                                            3,000,000                    2,000,000

Retained earnings                                                         4,600,000                    1,800,000

                                                                                    $8,900,000                  $4,900,000

 

 

 

 

QUESTION 1 (continued)

 

PICASSO CORPORATION AND MONET COMPANY

Income Statements and Retained Earnings

year ended December 31, 2020

 

                                                                                      PICASSO                   MONET     _

Sales                                                                            $3,500,000                  $1,750,000

Dividend Revenue                                                             35,000                        --

Other Revenues                                                               100,000                         50,000

Total Revenues                                                           $3,635,000                  $1,800,000

 

Cost of Goods Sold                                                       2,400,000                    1,300,000

Gross Profit                                                                   1,235,000                       500,000

Selling and administrative expenses                               204,000                         84,000

Bond Interest expense                                                       46,000                         56,000

Amortization                                                                    300,000                       160,000

Income Before Tax                                                          685,000                       200,000

Income taxes (30%)                                                         205,500                         60,000

Net income                                                                      479,500                       140,000

Retained earnings Jan 1, 2020                                      4,195,500                    1,710,000

Dividends                                                                          75,000                          50,000

Retained earnings Dec 31, 2020                                 $4,600,000                  $1,800,000

 

Additional Information

 

1.         Property, plant and equipment (PPE) items held by Monet as of January 1, 2017 are being amortized over their useful life of 10 years.  Inventory held by Monet as of January 1, 2017 was sold by September 1, 2017.  The patent had an estimated useful life of 20 years at January 1, 2017. 

 

2.         During 2019 and 2020, the fair value of goodwill declined by $10,000 and $20,000, respectively.  The fair value of goodwill was not impaired prior to 2019.

 

3.         In 2019, Monet sold Picasso inventory for $90,000.  Monet sold the inventory at a 25% gross profit.  Similarly, in 2020 Monet sold Picasso inventory for $75,000, at a 25% gross profit.  As of December 31, 2019 and 2020, one-half of the inventory remained in Picasso’s inventory.

 

4.         During 2020 Picasso sold merchandise that had been purchased for $125,000 to Monet for $250,000.  All of this merchandise remained in the December 31 inventory of Monet.  Half of the goods purchased remained unpaid at December 31, 2020.

 

5.         The $50,000 “Other Revenues” for Monet related to Monet selling land to an unrelated party on April 1, 2020.  Picasso had previously sold Monet the land for proceeds of $100,000 on July 1, 2019, when the land had a cost of $80,000.

 

 

QUESTION 1 (continued)

 

6.         Other Revenues reported by Picasso in 2020 includes $40,000 management fees charged to Monet.  Monet included this amount in selling and admin expenses.

 

7.         On January 1, 2019 Picasso sold Monet equipment with a book value of $450,000 for $500,000.   The equipment originally cost Picasso $630,000.  It had a remaining life of five years at the date of the inter-company sale.

 

8.         Both parties pay taxes at a rate of 30%.  

 

REQUIRED:

 

a.         Calculate goodwill relating to the acquisition of Monet on January 1, 2017 (2 marks) and prepare a acquisition differential amortization schedule to December 31, 2020. (2 marks)  Use the entity theory for calculations.

            

b.         Summarize inter-company revenues and expenses (eliminations).

            Summarize inter-company unrealized profits and losses before and after tax for all years. (8 marks)

 

c.         Prepare a Consolidated Income Statement for the year ended December 31, 2020. (14 marks)

 

d.         Prepare a Consolidated Balance Sheet as at December 31, 2020 (14 marks)

            Show supporting calculations for Non-Controlling Interest and Retained Earnings at Dec. 31, 2020.

            (14 marks) 

 

Answer rating: 100% (QA)

1 Goodwill relating to the acquisition of Monet on January 1 2017 11500000 computation below Computation for Goodwill as of January 1 2017 Fair value ... View the full answer