Question 1: Complete the following. Marks are allocated for before tax unrealized profit and after tax unrealized profit. Show calculations for possible part marks.

a) P Company sold merchandise to a subsidiary for $64,000. Gross profit rate is 40%. At year end, 20% of this remains unsold. The tax rate is 30%. What is the before tax and after-tax unrealized profit in ending inventory? Please highlight the after-tax unrealized profit in yellow. (2 marks)

Clearly indicate your answers as shown below:

Calculations:

Before tax unrealized profit:

After tax unrealized profit:

b) P Company sold merchandise to a subsidiary for $63,000. The mark-up on cost is 50%. At year end, 20% of this remains unsold. The tax rate is 30%. What is the before tax and after tax unrealized profit in ending inventory? Please highlight the after-tax unrealized profit in yellow. (2 marks)

Clearly indicate your answers as indicated below:

Calculations:

Before tax unrealized profit:

After tax unrealized profit:

c) AB Company issued a 10 year, 5%, $2,000,000 bond paying interest twice a year at a market rate of 4.2%. What was the issue price? Please highlight the issue price in yellow. (2 marks)

Question 2: On January 1, 2017, Happy Inc. purchased 80% of the outstanding common shares of Sad Co. for $400,000. Happy will account for Sad using the Fair Value Enterprise method. The balance sheets for both companies immediately after the transaction appear below.

Cash Accounts receivable Inventory Plant and Equipment Land Investment in Sad Co. Goodwill Accounts payable Bonds payable Common shares Retained earnings 3; 115,000 205,000 160,000 700,000 80,000 400,000 $ 1,660,000 $ 250,000 640,000 350,000 420,000 $ 1,660,000 Book value $ 30,000 90,000 130,000 560,000 90,000 $ 170,000 450,000 240,000 65,000 $ 925,000 Fair value $ 30,000 90,000 140,000 540,000 150,000 $ 170,000 460,000