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Assignment 1

 

This assignment should be completed after Chapter 5. It contributes 5% toward your final grade. Remember to show all your work as partial marks may be awarded.

 

Question 1                                                                                                 (15 marks)

 

On January 2, 2013, Potter Ltd. purchased 40% ontiago Ltd. for $900,000. At the acquisition date, Santiago’s balance sheet showed total shareholders’ equity of $1,500,000. Any acquisition differential is to be allocated to Santiago’s equipment. At the acquisition date, the equipment had a remaining useful life of 10 years. For the past 5 years, Santiago has paid annual dividends of $50,000 and will continue to do so in the future.

 

The following information has been extracted from Santiago’s income statement:

                                                                                                            2014   2013

Net income (loss) before extraordinary items                             $ (90,000)      $ 450,000

Extraordinary gain (net of tax)                                                           __-___        150,000

Net income (loss)                                                                             $ (90,000)      $ 600,000

 

Required:

 

Assume that Potter has significant influence. Prepare Potter’s journal entries related to its investment in Santiago for 2013 and 2014.

 

 


 

Question 2                                                                                      (25 marks)

 

On September 1, 2014, Sunshine Ltd. acquired all the assets (with the exception of cash) and liabilities of Moonbeam Ltd. Under the terms of acquisition, Moonbeam shareholders received 3 Class A Sunshine Ltd. shares plus $2.00 cash for every four shares of Moonbeam. At the acquisition date, Sunshine’s Class A shares were valued at $2.50 per share. Sunshine had agreed to cover Moonbeam’s estimated liquidation costs of $10,000. The $1,500 of cash in Moonbeam’s bank at the acquisition date will go towards paying these costs. The statements of financial position at the acquisition date are as follows:

 

                                                                                  Sunshine              Moonbeam Ltd.

                                                                                    Ltd.      Cost    FMV

Cash                                                              $30,000          $     1,500       $    1,500

Accounts receivable                                                              52,500               28,500           26,250

Inventory                                                                     78,000               39,750           48,000

Property and equipment (net)                                449,250             224,250         248,250

Kucey Ltd. bonds (investment)                              _67,500          _27,000              28,500

                                                                                    677,250          321,000         

 

Accounts payable                                                    117,000             114,000         114,000

Loan payable                                                            ___-___            _60,000           60,000

                                                                                    117,000             174,000

 

Share capital issued at $1                                      450,000             120,000

Retained earnings                                                   110,250             _27,000

                                                                                    560,250          147,000

                                                                                $ 677,250          $ 321,000

 

Items not reflected in Moonbeam’s statement of financial position:

 

·         Contingent liability related to a loan guaranteewas reported in the notes to the financial statements and has a fair value of $2,000.

 

·         Moonbeam had expensed $15,000 in research and development costs in the past year. At the acquisition date, Sunshine has determined that the value of the research in progress is $3,000.

 

Sunshine’s statement of financial position does not include $5,000 in fees for valuation and accounting advice related to the acquisition of Moonbeam. Sunshine expects to pay these fees shortly.

 

Required:

 

a)           Prepare the acquisition analysis and calculate the goodwill.

b)           Prepare all the journal entries in Sunshine’s books to record the acquisition of Moonbeam.

c)           Prepare Sunshine’s statement of financial position immediately following the acquisition.

Question 3                                                                                      (40 marks)

 

On May 1, 2013, Peat Co. purchased all of Sorbet Ltd.’s issued common shares for $630,000. At the acquisition date, Sorbet’s financial statements included the following balances:

 

                   Share capital                                                $400,000

                        Retained earnings                           210,000

                        Goodwill                                            10,000

 

At the acquisition date, Sorbet’s identifiable assets and liabilities were equal to their fair values, except in the case of inventory that had a book value of $80,000 and a fair value of $86,000, and equipment that had a book value of $360,000 and a fair value of $370,000. The equipment was originally purchased for $480,000. At the acquisition date, the equipment had a remaining useful life of 5 years and was amortized using the straight-line method. All the inventory that Sorbet had on hand at the acquisition date was sold by October 2013. Sorbet’s goodwill has not shown indications of impairment. Both Peat and Sorbet have April 30 thyear-ends and did not have any intercompany sales with each other. 

 

The financial statements for Peat and Sorbet at April 30, 2015 are presented on the following pages.

 


 

Statement of Financial Position

April 30, 2015

 

                                                                                                            Peat Co.         Sorbet Ltd.

Assets:

Current assets:

Cash                                                                                      $  52,000        $ 161,600

Accounts receivable                                                                                    100,000               80,000

Inventory                                                                                           120,000          170,000

                                                                                                            272,000             411,600

Non-current assets:

Equipment, net                                                                                 558,000             368,000

Furniture and fixtures, net                                                               51,000               51,600

Investment in Sorbet Ltd.                                                                630,000                   -

Goodwill                                                                                            ___-___         10,000

                                                                                                1,239,000      429,600

Total assets                                                                                $ 1,511,000          $ 841,200

 

Liabilities and shareholders’ equity:

Current liabilities:

Accounts payable                                                                     $      69,000           $  19,600

Non-current liabilities:

Loan payable                                                                                    22,000           32,000

Total liabilities                                                                                   91,000            51,600

Shareholders’ equity:

Share capital                                                                                            1,000,000          400,000

Retained earnings                                                                           420,000          389,600

                                                                                                1,420,000      789,600

Total liabilities and shareholders’ equity                              $ 1,511,000          $ 841,200

 

 

Condensed Statement of Income

For the year ended April 30, 2015

                                                                                               

                                                                                                            Peat Co.         Sorbet Ltd.

 

Sales                                                                                              $ 250,000          $ 180,000

Expenses                                                                                          170,000          130,000

Net income                                                                                    $   80,000           $   50,000

 


 

Statement of Changes in Equity

For the year ended April 30, 2015

 

                                                                                                            Peat Co.         Sorbet Ltd.

 

Share capital                                                                                         $ 1,000,000          $ 400,000

 

Retained earnings, May 1, 2014                                                   340,000             339.600

Net income                                                                                        80,000            50,000

Retained earnings, April 30, 2015                                                            420,000          389,600

Total shareholders’ equity                                                       $ 1,420,000          $ 789,600

 

Required:

 

Prepare Peat’s consolidated financial statements for April 30, 2015. Ignore income taxes.

 


 

Question 4                                                                                      (20 marks)

 

On June 30, 2014, Pewter Ltd. gave 28,000 shares to Sterling Co. in exchange for 70% of Sterling’s outstanding shares. At the time of the exchange, Pewter’s shares had a fair value of $22.50 per share. The post-acquisition statements of financial position and Sterling’s fair values are shown below.

 

Statement of Financial Position

As of June 30, 2014

 

                                                                                                                        Sterling Co.______

                                                                                    Pewter Ltd.       Book value      Fair Value

Assets:

Current assets:

Cash                                                                     $    750,000        $     37,500          $   37,500

Accounts receivable                                                1,500,000           112,500             112,500

Inventory                                                                     150,000          37,500                    37,500

                                                                        2,400,000      187,500

Non-current assets:

Land                                                                             750,000             225,000             300,000

Equipment                                                              2,250,000             375,000             412,500

Accumulated amortization                                     (900,000)           (112,500)  

Investment in Sterling                                               630,000              __  -___

                                                                        2,730,000      487,500

            Total assets                                       $  5,130,000  $ 675,000

 

Liabilities and shareholders’ equity:

Current liabilities:

Accounts payable                                              $     750,000        $     75,000            75,000

Loan payable                                                300,000                 _____

                                                                        1,050,000      75,000

Shareholders’ equity:

Common shares                                                    2,580,000             150,000

Retained earnings                                       1,500,000450,000

                                                                        4,080,000      600,000

Total liabilities and shareholders’ equity$  5,130,000      $   675,000

 

Required:

 

a)      Calculate Pewter’s consolidated goodwill.

 

b)      Prepare Pewter’s consolidated statement of financial position at
June 30, 2014 using the entity theory method of consolidation.

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