Question $1$

$50$

Points

Group Assignment $(50$ marks$)$

On January $1,$ Year $3,$ the Pen Company purchased $80\%$ of the outstanding voting shares of the Silk Company for $$1\mathrm{.}6$ million in cash. On that date, Silk$$s balance sheet and the fair values of its identifiable assets and liabilities were as follows:

Carrying Value

Fair Value

Cash

$ $25,000$

$ $25,000$

Accounts receivable

$310,000$

$290,000$

Inventories

$650,000$

$600,000$

Plant and equipment $($net$)$

$2,015,000$

$2,050,000$

Total assets

$$3,000,000$

Current liabilities

$$300,000$

$300,000$

Long$-$term liabilities

$1,200,000$

$1,100,000$

Common shares

$500,000$

Retained earnings

$1,000,000$

Total liabilities and shareholders$$ equity

$$3,000,000$

On January $1,$ Year $3,$ Silk$$s plant and equipment had a remaining useful life of $8$ years. Its long$-$term liabilities matured on January $1,$ Year $7.$ Goodwill, if any, is to be tested yearly for impairment.

The balance sheets as on December $31,$ Year $9,$ for the two companies were as follows:

BALANCE SHEETS

As on December $31,$ Year $9$

Pen

Silk

Cash

$$500,000$

$ $40,000$

Accounts receivable

$1,700,000$

$500,000$

Inventories

$2,300,000$

$1,200,000$

Plant and equipment, net

$8,200,000$

$4,000,000$

Investment in Silk, at cost

$1,600,000$

$$

Land

$700,000$

$260,000$

Total assets

$$15,000,000$

$$6,000,000$

Current liabilities

$$600,000$

$$200,000$

Long$-$term liabilities

$3,000,000$

$3,000,000$

Common shares

$1,000,000$

$500,000$

Retained earnings

$10,400,000$

$2,300,000$

Total liabilities and shareholders$$ equity

$$15,000,000$

$$6,000,000$

Additional Information

The inventories of both companies have a maximum turnover period of one year. Receivables have a maximum turnover period of $62$ days.

On July $1,$ Year $7,$ Pen sold a parcel of land to Silk for $$100,000.$ Pen had purchased this land in Year $4$ for $$150,000.$ On September $30,$ Year $9,$ Silk sold the property to another company for $$190,000.$

During Year $9,$ $$2$ million of Pen$$s sales were to Silk. Of these sales, $$500,000$ remains in the December $31,$ Year $9,$ inventories of Silk. The December $31,$ Year $8,$ inventories of Silk contained $$312,500$ of merchandise purchased from Pen. Pen$$s sales to Silk are priced to provide it with a gross profit of $20\%.$

Pen and Silk reported net income of $$1,000,000$ and $$400,000,$ respectively, for Year $9.$

During Year $9,$ $$1\mathrm{.}5$ million of Silk$$s sales were to Pen. Of these sales, $$714,280$ remains in the December $31,$ Year $9,$ inventories of Pen. The December $31,$ Year $8,$ inventories of Pen contained $$857,140$ of merchandise purchased from Silk. Silk$$s sales to Pen are priced to provide it with a gross profit of $30\%.$

Dividends declared on December $31,$ Year $9,$ were as follows:

Pen

$$350,000$

Silk

$100,000$

Goodwill impairment tests resulted in losses of $$52,200$ in Year $4$ and $$8,700$ in Year $9.$

Assume a $40\%$ tax rate for both companies and that dividends have not yet been paid.

Required

Calculate acquisition differential. $(3$ marks$)$

Calculate goodwill if any. $(3$ marks$)$

Calculate acquisition non$-$controlling interests. $(2$ marks$)$

Calculate amortization schedule of required assets and liabilities. $(5$ marks$)$

Calculate intercompany profit$/$loss after tax. $(5$ marks$)$

Calculate consolidated retained earnings at January $1,$ Year $9.(7$ marks$)$

Calculate consolidated net income at December $31,$ Year $9.(10$ marks$)$

Calculate consolidated non$-$controlling interests at December $31,$ Year $9.(3$ marks$)$

Prepare the balance sheet for Year $9.(12$ marks$)$