ASSIGNMENT $5$

Question $1(25$ marks$)$

On December $31,2013,$ Poplar Inc. purchased $80\%$ of the $600,000$ outstanding common shares of Spruce Ltd for

$$5\mathrm{.}4$ million in cash. On that date, the shareholders' equity of Spruce totalled $$6$ million and consisted of $$1$ million

in common shares, $$1$ million in contributed surplus and $$4$ million in retained earnings. On December $31,2013,$

Spruce had a plot of land with a fair value that was $$100,000$ greater than its carrying value, equipment $($with a

remaining life of $6$ years$)$ with a fair value that was $$120,000$ greater than its carrying value and long$-$term debt

maturing on December $31,2021$ with a fair value that was $$200,000$ greater than its book value. Any remaining

purchase discrepancy was allocated to goodwill which was assessed annually for impairment.

For the year ended December $31,2019,$ the condensed income statements for the two companies were as follows:

Total assets

Other information:

Poplar values the noncontrolling interest in its subsidiary based on the market value of the subsidiary's shares

immediately following the acquisition. When the markets opened on January $2,2014,$ shares of Spruce were

trading for $$11$ per share.

Impairment of the controlling interest in the subsidiary's goodwill was $$85,000$ in $2015$ and $$170,000$ in $2019.$

Impairment of the noncontrolling interest in goodwill was $$15,000$ in $2015$ and $$30,000$ in $2019.$ There was no

goodwill impairment recognized in any other year.

On July $1,2018,$ Spruce sold the land to which the purchase discrepancy related to an unrelated company,

recording a profit of $$200,000$ before income taxes from the sale.

On January $1,2018,$ Spruce sold a machine to Poplar for $$30,000.$ When Spruce purchased the machine on

January $1,2011$ for $$80,000,$ it was estimated that its service life would be ten years with no salvage value.

There was no change in the estimated service life or salvage value at the time of the intercompany sale.

During $2019,$ Poplar sold merchandise to Spruce for $$100,000,$ a price that included a gross profit of $$40,000.$

During $2019,$ half of this merchandise was resold by Spruce and the other half remained in its December $31,$

$2019,$ inventories. On December $31,2018,$ the inventories of Spruce contained merchandise purchased from

Poplar on which Poplar had recorded a gross profit of $$25,000.$

On December $31,2019,$ Spruce owed Poplar $$100,000.($At the end of $2018,$ Spruce owed Poplar $$50,000.)$

During $2019,$ Poplar declared and paid dividends of $$300,000$ and Spruce declared and paid dividends of

$$100,000.$

Poplar accounts for its investment using the cost method.

Both companies pay income tax at a marginal rate of $40\%.$ In preparing its consolidated financial statements,

Poplar accounts fully for the future income taxes arising from intercompany transactions but does not account

for income taxes in its allocation of the purchase discrepancy.

Required:

$($a$)$ Calculate the consolidated net income of Poplar Inc. and its subsidiary Spruce Ltd$.$ for the year ended

December $31,2019.$

$($b$)$ Prepare the condensed consolidated balance sheet of Poplar Inc. and its subsidiary Spruce Ltd$.$ as at

December $31,2019.$ Show your calculations of consolidated retained earnings and noncontrolling interest.