Assignment Ch 6: Consolidation Question POP Inc. purchased 90% of the voting shares of SOS Inc for $1,000,000 cash on January 1, 20X3; in addition, the purchase agreement also included a contingent consideration payable in cash on January 1, 20X9. Assume that since the acquisition date management believes that $200,000 is the contingent consideration likely to become payable on January 1, 20X9 (ignore time value of money). POP uses the cost method to account for its investment. On that date, SOS's Common Stock and Retained Earnings were valued at $300,000 and $500,000 respectively. SOS's fair values approximated its carrying values with the following exceptions: The equipment had a fair value which was $ 120,000 higher than its carrying value, and was estimated to have a remaining useful life of 10 years from the date of acquisition with no salvage value. SOS's inventory had a fair value which was $15,000 less than book value. This inventory was sold by SOS in 20X3. SOS's skilled workforce had an exceptional reputation in the industry. Experts believed that the reputation of the work force should be valued at $200,000. Both companies use straight line amortization exclusively for all assets and liabilities. The effective tax rate for both companies is 40%. The Financial Statements of POP & SOS for the Year ended December 31, 20X6 are shown below: Income Statements POP Inc. SOS Inc. Sales Other Revenues $1,300,000 $400,000 $830,000 $200,000 Less: Expenses: Cost of Goods Sold: Depreciation Expense Other Expenses Income Tax Expense $700,000 $30,000 $120,000 $170,000 $330,000 $20,000 $140,000 $120,000 Net Income S680,000 $420,000 Retained Earnings Statements Balance, Jan 1, 2016 Net Income Less: Dividends $1,000,000 $680,000 ($200,000) $800,000 $420,000 (S140,000) Retained Earnings $1,480,000 $1,080,000 Page 1 1 of 2 Balance Sheets POP Inc. SOS Inc. $340,000 $410,000 $475,000 Cash Accounts Receivable Inventory Investment in SOS Inc. Land Equipment (net) $100,000 $300.000 $320.000 $1,000,000 $100,000 $220,000 $80,000 $210,000 Total Assets $2,040,000 $1,515,000 Current Liabilities Common Shares Retained Earnings $160,000 $400,000 S1,480,000 $135,000 $300,000 $1,080,000 Total Liabilities and Equity $2,040,000 $1,515,000 Other Information: 1. During 20X6, SOS sold a parcel of land to POP for $100,000 cash. SOS had purchased this land in 2012 for $60,000. POP is currently using the land to hold excess inventory. 2. During 20X6 POP charged SOS $50,000 of rental fees. SOS did not pay this amount in 2016 but expects to pay the full $50,000 sometime in 20x7. 3. During December 20X6, SOS sold inventory 10 POP for $100,000 cash, the cost of the inventory to SOS was $70,000. 50% of these goods remained in POP's inventory at the end of 2016. 4. During December 20X5, POP sold inventory to SOS for $60,000 cash, the cost of the inventory to POP was $40,000. 40% of these goods remained in SOS's inventory at the end of 20X5. SOS eventually sold the entire inventory to an outside customer in 20X6. 5. Year 20X4 there was impairment in GW of S30,000. REQUIRED: a) Prepare a schedule showing the calculation of goodwill at the date of acquisition of SOS under the entity theory, and a purchase price discrepancy amortization schedule. b) Prepare a schedule showing the inter-company realized and unrealized profits for 20x3 to 20X6. Your schedule should include both pre-tax and after-tax amounts. c) Prepare the consolidated financial statements under the entity theory: Income statement and Retained Earnings for the year ended December 31", 20X6, and Balance Sheet as at December 31", 20X6. Show all supporting calculations. NOTE: In preparing Consolidated Statement of Retained burnings you need to first calculate the opening retained earnings. Page 2 of 2 Assignment Ch 6: Consolidation Question POP Inc. purchased 90% of the voting shares of SOS Inc for $1,000,000 cash on January 1, 20X3; in addition, the purchase agreement also included a contingent consideration payable in cash on January 1, 20X9. Assume that since the acquisition date management believes that $200,000 is the contingent consideration likely to become payable on January 1, 20X9 (ignore time value of money). POP uses the cost method to account for its investment. On that date, SOS's Common Stock and Retained Earnings were valued at $300,000 and $500,000 respectively. SOS's fair values approximated its carrying values with the following exceptions: The equipment had a fair value which was $ 120,000 higher than its carrying value, and was estimated to have a remaining useful life of 10 years from the date of acquisition with no salvage value. SOS's inventory had a fair value which was $15,000 less than book value. This inventory was sold by SOS in 20X3. SOS's skilled workforce had an exceptional reputation in the industry. Experts believed that the reputation of the work force should be valued at $200,000. Both companies use straight line amortization exclusively for all assets and liabilities. The effective tax rate for both companies is 40%. The Financial Statements of POP & SOS for the Year ended December 31, 20X6 are shown below: Income Statements POP Inc. SOS Inc. Sales Other Revenues $1,300,000 $400,000 $830,000 $200,000 Less: Expenses: Cost of Goods Sold: Depreciation Expense Other Expenses Income Tax Expense $700,000 $30,000 $120,000 $170,000 $330,000 $20,000 $140,000 $120,000 Net Income S680,000 $420,000 Retained Earnings Statements Balance, Jan 1, 2016 Net Income Less: Dividends $1,000,000 $680,000 ($200,000) $800,000 $420,000 (S140,000) Retained Earnings $1,480,000 $1,080,000 Page 1 1 of 2 Balance Sheets POP Inc. SOS Inc. $340,000 $410,000 $475,000 Cash Accounts Receivable Inventory Investment in SOS Inc. Land Equipment (net) $100,000 $300.000 $320.000 $1,000,000 $100,000 $220,000 $80,000 $210,000 Total Assets $2,040,000 $1,515,000 Current Liabilities Common Shares Retained Earnings $160,000 $400,000 S1,480,000 $135,000 $300,000 $1,080,000 Total Liabilities and Equity $2,040,000 $1,515,000 Other Information: 1. During 20X6, SOS sold a parcel of land to POP for $100,000 cash. SOS had purchased this land in 2012 for $60,000. POP is currently using the land to hold excess inventory. 2. During 20X6 POP charged SOS $50,000 of rental fees. SOS did not pay this amount in 2016 but expects to pay the full $50,000 sometime in 20x7. 3. During December 20X6, SOS sold inventory 10 POP for $100,000 cash, the cost of the inventory to SOS was $70,000. 50% of these goods remained in POP's inventory at the end of 2016. 4. During December 20X5, POP sold inventory to SOS for $60,000 cash, the cost of the inventory to POP was $40,000. 40% of these goods remained in SOS's inventory at the end of 20X5. SOS eventually sold the entire inventory to an outside customer in 20X6. 5. Year 20X4 there was impairment in GW of S30,000. REQUIRED: a) Prepare a schedule showing the calculation of goodwill at the date of acquisition of SOS under the entity theory, and a purchase price discrepancy amortization schedule. b) Prepare a schedule showing the inter-company realized and unrealized profits for 20x3 to 20X6. Your schedule should include both pre-tax and after-tax amounts. c) Prepare the consolidated financial statements under the entity theory: Income statement and Retained Earnings for the year ended December 31", 20X6, and Balance Sheet as at December 31", 20X6. Show all supporting calculations. NOTE: In preparing Consolidated Statement of Retained burnings you need to first calculate the opening retained earnings. Page 2 of 2