Advanced Financial Accounting

Chapters 6/7: Intercompany Profits

Comprehensive Consolidation Question

On December 31, 2021, Pokeman Limited purchased 60% of the outstanding ordinary shares of Surfer Company for $7,400,000 in cash.On acquisition date, the shareholders' equity of Surfer consisted of $2,000,000 in ordinary shares and $4,000,000 in retained earnings.

Also on this date, Surfer had inventory with a fair value that was $200,000 less than its carrying value.In addition, Surfer had equipment with a fair value that was $300,000 greater than its carrying value.The equipment had an estimated useful life of 8 years on December 31, 2001. Surfer had an unrecorded Patent worth $120,000 and a useful life of 6 years.Finally, Surfer's long term liabilities valued at $100,000 less than the carrying (book) value.The LT Liabilities had a ten year term ending in 2031.

Each year, consolidated goodwill is tested for impairment.Goodwill had a value of $1,300,000 at December 31, 2025 and $1,000,000 at December 31, 2026.

For the year ended December 31, 2026, the statements of profit or loss for Pokeman and Surfer were as follows:

Pokeman

Surfer

Sales

$24,000,000

12,500,000

Other Income

5,000,000

1,000,000

Total revenues

30,000,000

13,500,000

Cost of goods sold

18,000,000

8,200,000

Depreciation/ amortization expense

3,400,000

1,800,000

Other expenses

4,200,000

1,500,000

Income tax expense

1,100,000

500,000

Total expenses

26,700,000

12,000,000

Net income

3,300,000

1,500,000

At December 31, 2026, the condensed statements of financial position for the two companies were as follows:

Pokeman

Surfer

Current assets

15,000,000

8,600,000

Non-current assets

28,600,000

17,400,000

Investment in Surfer

8,400,000

__________

Total assets

52,000,000

26,000,000

Liabilities

26,400,000

13,600,000

Common shares

12,400,000

2,000,000

Retained earnings

13,200,000

10,400,000

Total liabilities and equity

52,000,000

26,000,000

Additional information:

1.Intercompany sales of goods are made to earn a margin of 30%

2.In 2025, Surfer sold merchandise to Pokeman for $500,000, of which Pokeman sold 60% to unrelated third parties during 2025.

3.During 2026, Surfer sold merchandise to Pokeman for $400,000, 75% of which remains in Pokeman's inventory on December 31, 2026.

4.In 2025, Pokeman sold merchandise to Surfer for $600,000; Surfer's 2025 ending inventory contained 40% of this inventory.

5.During 2026, Pokeman sold merchandise to Surfer for $750,000; Surfer's 2026 ending inventory contains 30% of this inventory.

6.Surfer owes Pokeman $200,000 as of December 31, 2026 for inventory purchases.

7.Pokeman provides management services for various projects operated by Surfer.For 2026, the amount charged was $20,000 per month for a total of $240,000.Payments for these services are made on the 15th of the following month.

8.During 2026, Pokeman declared and paid dividends of $1,600,000 while Surfer declared and paid dividends of $700,000.

9.On January 1, 2023, Pokeman sold equipment to Surfer for $160,000.Pokeman had acquired the equipment on June 30, 2022 for $240,000 and had estimated a useful life of 6 years.There were no changes made to the remaining useful life when Surfer acquired the equipment.

10. Also in 2023, Surfer sold a piece of land to Pokeman at a profit of $120,000. Half of this land was sold in 2026 to an unrelated third party.

11. On July 1, 2026 Pokeman sold a building to Surfer for $500,000. The building had a net book value of $400,000 (after updating depreciation to the date of sale) on the books of Pokeman, with a remaining useful life of 5 years.

12. Both companies have an income tax at the rate of 15%.

Required:

a)Prepare Pokeman's consolidated statement of profit or loss for the year ended and a statement of financial position as at December 31, 2026.