QUESTION #$3$

On December $31$st$\mathrm{.}2019,$ X Company purchased $70\%$ of the outstanding common shares of the Y Company for $$8\mathrm{.}4$ million in cash. On that date the shareholders$$ equity of Y consisted of $$2$ million in common shares and $$6$ million in retained earnings. Both companies use the FIFO method to account for inventory and the straight$-$line method to calculate depreciation.

For the year ended December $31$st$.2024,$ the income statements of X and Y were as follows:

X$.............................................$Y

Sales and other income..............................$$28,800,000.................................$$$13,000,000$

Cost of Goods sold..................................... $18,000,000.................................8,200,000$

Depreciation Expense................................. $3,400,000................................1,800,000$

Income tax and other expenses................... $4,200,000................................1,600,000$

NET INCOME..................................................$ $3,200,000...............................$ $ $1,400,000$

$6$

At December $31$st$,2024,$ the condensed balance sheets for the two companies were as follows:

X$.............................................$Y

Current assets..................................................$$15,000,000.........................$$$8,800,000$

Non$-$current assets............................................ $28,600,000.........................17,400,000$

TOTAL ASSETS....................................................$$43,600,000........................$$$26,200,000$

Liabilities............................................................$$26,400,000........................$$$13,800,000$

Common Shares.................................................. $4,000,000.........................2,000,000$

Retained Earnings................................................ $13,200,000.........................10,400,000$

TOTAL LIABILITIES& OWNERS$$ EQUITY................. $$43,600,000........................$ $$26,200,000$

Additional Information:$-$

i$.$ On December $31$st$.2019,$ Y had inventory with a fair value that was $$100,000$ less than its carrying value.

ii$.$ On December $31$st$.2019,$ Y had equipment with a fair value that was $$400,000$ greater than its carrying value. The equipment had a remaining useful life of $8$ years.

iii. X uses the acquisition method for consolidation. Each year goodwill is evaluated to determine if there has been a permanent impairment. Goodwill had a value of $$3,580,000$ at December $31$st$\mathrm{.}2023$ and $$3,200,000$ at December $31$st$.2024.$

iv$.$ On January $2$nd$\mathrm{.}2022,$ Y sold a machine to X for $$1,200,000.$ Y purchased the machine on January $1$st$.2018$ for $$1,800,000$ and was depreciating the machine over $10$ years. There was no change in the estimated service life at the time of the intercompany sale.

v$.$ During $2024,$ X sold merchandise to Y for $$600,000,75\%$ of this remains in Y$$s inventory at December $31$st$\mathrm{.}2024.$ On December $31$st$\mathrm{.}2023,$ the inventory of Y contained $$100,000$ of merchandise purchased from X$.$ X earns a gross margin of $30\%$ on its intercompany sales.

vi$.$ During $2024,$ X declared and paid dividends of $$2,600,000$ while Y declared and paid dividends of $$800,00.$

vii. X accounts for its investment using the cost method.

viii. Both companies pay income taxes at the rate of $40\%.$

$7$

Required:$-$

i$.$ Calculate the goodwill at the date of acquisition$(5$ marks$)$

ii$.$ Prepare the amortization schedule to December $31$st$.2024(4$ marks$)$

iii. Prepare the tax schedule for the intercompany sale of the equipment$(4$ marks$)$

iv$.$ Prepare the tax schedule for the intercompany sale of inventory$(2$ marks$)$

v$.$ Calculate consolidated net income for the year $2024(8$ marks$)$