Advanced Accounting questions (4)

1 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: Net income (loss) before extraordinary items Extraordinary gain (net of tax) Net income (loss) 2014 $ (90,000) __-___ $ (90,000) 2013 $ 450,000 150,000 $ 600,000 Required: Assume that Potter has significant influence. Prepare Potter's journal entries related to its investment in Santiago for 2013 and 2014. ACCT451v12 Assignment 1 August 8, 2014 2 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: Cash Accounts receivable Inventory Property and equipment (net) Kucey Ltd. bonds (investment) Accounts payable Loan payable Share capital issued at $1 Retained earnings Sunshine Ltd. $ 30,000 52,500 78,000 449,250 _67,500 677,250 Moonbeam Ltd. Cost FMV $ 1,500 $ 1,500 28,500 26,250 39,750 48,000 224,250 248,250 _27,000 28,500 321,000 117,000 ___-___ 117,000 114,000 _60,000 174,000 450,000 110,250 560,250 $ 677,250 114,000 60,000 120,000 _27,000 147,000 $ 321,000 Items not reflected in Moonbeam's statement of financial position: Contingent liability related to a loan guarantee was 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) b) Prepare the acquisition analysis and calculate the goodwill. 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) ACCT451v12 Assignment 1 August 8, 2014 3 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 Retained earnings Goodwill $400,000 210,000 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 th year-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. ACCT451v12 Assignment 1 August 8, 2014 4 Statement of Financial Position April 30, 2015 Peat Co. Sorbet Ltd. 52,000 100,000 120,000 272,000 $ 161,600 80,000 170,000 411,600 558,000 51,000 630,000 ___-___ 1,239,000 $ 1,511,000 368,000 51,600 10,000 429,600 $ 841,200 $ 69,000 $ 19,600 22,000 91,000 Assets: Current assets: Cash Accounts receivable Inventory 32,000 51,600 1,000,000 420,000 1,420,000 $ 1,511,000 400,000 389,600 789,600 $ 841,200 $ Non-current assets: Equipment, net Furniture and fixtures, net Investment in Sorbet Ltd. Goodwill Total assets Liabilities and shareholders' equity: Current liabilities: Accounts payable Non-current liabilities: Loan payable Total liabilities Shareholders' equity: Share capital Retained earnings Total liabilities and shareholders' equity Condensed Statement of Income For the year ended April 30, 2015 Peat Co. Sales Expenses Net income ACCT451v12 $ 250,000 170,000 $ 80,000 Assignment 1 Sorbet Ltd. $ 180,000 130,000 $ 50,000 August 8, 2014 5 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 Net income Retained earnings, April 30, 2015 Total shareholders' equity 340,000 80,000 420,000 $ 1,420,000 339.600 50,000 389,600 $ 789,600 Required: Prepare Peat's consolidated financial statements for April 30, 2015. Ignore income taxes. ACCT451v12 Assignment 1 August 8, 2014 6 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.______ Book value Fair Value Pewter Ltd. Assets: Current assets: Cash Accounts receivable Inventory $ Non-current assets: Land Equipment Accumulated amortization Investment in Sterling 750,000 1,500,000 150,000 2,400,000 $ 37,500 112,500 37,500 187,500 $ 37,500 112,500 37,500 750,000 2,250,000 (900,000) 630,000 2,730,000 $ 5,130,000 Liabilities and shareholders' equity: Current liabilities: Accounts payable Loan payable Shareholders' equity: Common shares Retained earnings Total liabilities and shareholders' equity 300,000 412,500 $ Total assets 225,000 375,000 (112,500) __ -___ 487,500 $ 675,000 $ 75,000 750,000 300,000 1,050,000 2,580,000 1,500,000 4,080,000 $ 5,130,000 75,000 _____ 75,000 150,000 450,000 600,000 $ 675,000 Required: a) b) Calculate Pewter's consolidated goodwill. Prepare Pewter's consolidated statement of financial position at June 30, 2014 using the entity theory method of consolidation. ACCT451v12 Assignment 1 August 8, 2014