Alpha Ltd. effectively gained control over Beta Inc. by acquiring 70% of Betas common shares paying $200,000 in cash and issuing shares with value of $500,000 to Betas shareholders on December 31, 2010. The balance sheets of Alpha (including the effects of the acquisition) and Beta on December 31, 2010 are shown below:

BALANCE SHEET	Post-Acquisition
	ALPHA	BETA
	Dec 31 2010	Dec 31 2010
Cash	500,000	320,000
A/R	670,000	500,000
Inventory	930,000	220,000
Other current assets	240,000	50,000
Equipment	800,000	400,000
Equipment acc depr	(200,000)	(200,000)
Building		450,000
Building acc depr		(45,000)
Goodwill		50,000
Investment in B	700,000
	3,640,000	1,745,000
Accounts payable	1,250,000	1,050,000
LT liabilities	1,730,000	268,781
Common Stock	1,000,000	400,000
R/E	(340,000)	26,219
	3,640,000	1,745,000

At the date of acquisition, the due diligence team determined the following fair values:

	BETA FV
A/R	480,000
Inventory	210,000
Equipment	250,000

The turnover of receivables and inventory is one year and Betas equipment had a useful life of five years at the acquisition date.

In addition, Alpha identified an additional intangible asset, a patent with estimated value of 50,000 and a useful life of ten years at the acquisition date.

Betas LT liabilities include a bank loan outstanding, obtained at the beginning of 2005. The loan repayment schedule is as follows:

Loan for $500,000 Annual payments at the end of the year
Payment =	($88,492.08)
	Annual	Interest Expense	Principal	Balance
Year	Payment	12% Annual	Repayment
Jan 1 2005				500,000
Dec 30 2005	88,492	60,000	28,492	471,508
Dec 30 2006	88,492	56,581	31,911	439,597
Dec 30 2007	88,492	52,752	35,740	403,856
Dec 30 2008	88,492	48,463	40,029	363,827
Dec 30 2009	88,492	43,659	44,833	318,994
Dec 30 2010	88,492	38,279	50,213	268,781
Dec 30 2011	88,492	32,254	56,238	212,543
Dec 30 2012	88,492	25,505	62,987	149,556
Dec 30 2013	88,492	17,947	70,545	79,011
Dec 30 2014	88,492	9,481	79,011	0

(Hint: The FV of a loan is the present value of all remaining payments using the current discount rate at the acquisition date)

At the acquisition date, Alpha determined that the market rate for a similar loan was 8%. All fair value differences are amortized using straight line.

During 2011 the following transactions took place:

Betas sales were entirely made to Alpha. Betas sales had a markup of 1.6 times COGS. At the end of 2011, 20 percent of the items sold to Alpha were still in Alphas inventory.

Alpha sold some product components to Beta for $96,000. Alphas sales to Beta had a markup of 1.2 times COGS. At the end of 2011, 50 percent of the items sold to Beta were still in Betas inventory.

Alpha sold equipment to Beta on January 1, 2011 for $40,000. This equipment had a net book value of $60,000 and a useful life of four years at the time of the sale.

Beta sold a building to Alpha for on July 1, 2011 for $525,000. This building had a net book value of $393,750 and a useful life of 17.5 years at the time of the sale.

There was a balance of $85,000 in intercompany accounts payable and receivable on December 31, 2011.

Beta issued a five year bond on December 30, 2011 at par with the following characteristics:

BONDS ISSUED ON DEC 30 2011 WHEN MAKT RATE = COUPON RATE = 12%
FACE VALUE = 500,000		MATURE DEC 31 2016
BETA Calculations
	COUPON	PRINCIPAL	SUM	PV FACTOR	PV
	BOND 12%			12% RATE
Year 0					500,000
Year 1	60,000		60,000	1/(1.12)^1	53,571
Year 2	60,000		60,000	1/(1.12)^2	47,832
Year 3	60,000		60,000	1/(1.12)^3	42,707
Year 4	60,000		60,000	1/(1.12)^4	38,131
Year 5	60,000	500,000	560,000	1/(1.12)^5	317,759
					500,000

During 2012 the following transactions took place:

Betas sales were entirely made to Alpha. Betas sales had a markup of 1.6 times COGS. At the end of 2012, 15 percent of the items sold to Alpha were still in Alphas inventory.

Alpha charged a consulting fee of $50,000 to Beta, included in Betas operating expenses.

In 2012 there was a $50,000 goodwill impairment.

Alpha purchased all of Betas bonds in the bond market for $485,128 on December 31, after the 2012 coupon payment. At that time the market rate was 13%.

BOND REPURCHASE DEC 31 2011
Market price using new discount rate
	COUPON	PRINCIPAL	SUM	PV FACTOR	PV
	BOND 12%			10% RATE
Year 0
Year 1
Year 2	60,000		60,000	1/(1.13)^1	53,097
Year 3	60,000		60,000	1/(1.13)^2	46,989
Year 4	60,000		60,000	1/(1.13)^3	41,583
Year 5	60,000	500,000	560,000	1/(1.13)^4	343,458
					485,128

During 2013 the following transactions took place:

There were no inter-company sales. Alphas sales were $1,000,000. Betas sales were $400,000.

At the end of 2013, there were no items purchased from Beta in Alphas inventory. Alphas COGS was $500,000. Betas COGS was $225,000.

At the end of 2013, the balance of bond liability on Betas balance sheet was $500,000 and the balance of bond asset on Alphas balance sheet was $488,846.

In 2013 Beta reported bond interest expense of $60,000. Alpha reported interest revenue from its bond investment of $63,718.

The financial statements of Alpha and Beta for 2011 and 2012 were as follows:

BALANCE SHEET	ALPHA	BETA
	Dec 31 2011	Dec 31 2011
Cash	27,500	407,746
A/R	268,500	430,000
Inventory	920,000	345,000
Other current assets	235,000	55,000
Equipment	720,000	440,000
Equipment acc depr	(380,000)	(290,000)
Building	525,000
Building acc depr	(15,000)
Goodwill		50,000
Investment in B	686,927
	2,987,927	1,437,746
Accounts payable	340,000	120,000
LT liabilities	1,730,000	768,781
NCI
Common Stock	1,000,000	400,000
R/E	(82,073)	148,965
	2,987,927	1,437,746

INCOME STATEMENT	ALPHA 2011	BETA 2011
Sales	1,200,000	600,000
Loss on sale of equipment	(20,000)
Gain on sale of building		131,250
Investment Income	21,927
	1,201,927	731,250
COGS	610,000	375,000
Operating expenses	52,500	50,000
Eq depreciation	180,000	90,000
Building depreciation	15,000	11,250
Interest expense	86,500	32,254
	944,000	558,504
Net Income	257,927	172,746

BALANCE SHEET	ALPHA	BETA
	Dec 31 2012	Dec 31 2012
Cash	302,872	269,003
Bond investment	485,128
A/R	230,000	450,000
Inventory	920,000	345,000
Other current assets	30,000	45,000
Equipment	720,000	440,000
Equipment acc depr	(560,000)	(380,000)
Building	525,000
Building acc depr	(45,000)
Goodwill		50,000
Investment in B	603,649
	3,211,649	1,219,003
Accounts payable	320,000	55,000
LT liabilities	1,730,000	712,543
NCI
Common Stock	1,000,000	400,000
R/E	161,649	51,460
	3,211,649	1,219,003

INCOME STATEMENT	ALPHA 2012	BETA 2012
Sales	1,200,000	608,000
Consulting revenue	50,000
Gain on bond retirement
Investment Income	(48,278)
	1,201,722	608,000
COGS	608,000	380,000
Operating expenses	53,500	100,000
Eq depreciation	180,000	90,000
Building depreciation	30,000
Interest expense	86,500	85,505
Goodwill impairment
	958,000	655,505
Net Income	243,722	(47,505)

Provide the following:

Consolidated balance sheet at acquisition on 2010;

Equity method entries for 2011 and summary of debits and credits to investment income and investment account;

Consolidated balance sheet and income statement for 2011;

Equity method entries for 2012 and summary of debits and credits to investment income and investment account;

Consolidated balance sheet and income statement for 2012; and,

Consolidated balances for the following accounts in 2013: Sales, COGS, bond asset, bond liability, bond interest expense, and bond interest revenue. Below are the balances reported by Alpha and Beta in 2013:

	ALPHA 2013	BETA 2013
Sales	1,000,000	400,000
COGS	500,000	225,000
Bond Investment	488,846
Bond Liability		500,000
Bond Interest Revenue	63,718
Bond Interest Expense		60,000